April 22, 2020

Should A Small Business Consider Filing Bankruptcy?

In addition, small businesses who have received funding, or will receive additional funding, still face a long road of uncertainty and economic turmoil ahead.

Even in these unprecedented economic times, in most instances, a small business should not consider filing for Chapter 11 reorganization at this time. Generally, most small businesses seek bankruptcy protection due to (1) significant creditor collection pressure and/or (2) the need to restructure a balance sheet, reduce liabilities and stretch out payments to creditors.

Significant creditor pressure that often results in a bankruptcy filing includes a foreclosure of assets, sweeping of funds from a bank account or entry of a judgment. Typically, a creditor’s action forces the hand of the small business owner to sign the bankruptcy petition to preserve operations and obtain a stay against collection.

Many states, including the State of Michigan, have entered orders staying or delaying collection or eviction actions. Many lenders are voluntarily extending loan payment deadlines and affording other relief from a borrower’s obligations. The nationwide crisis has created an atmosphere where there is very little creditor pressure.

Several small businesses may ultimately need to consider filing for bankruptcy to restructure its balance sheet while recovering from the economic fallout of the COVID-19 crisis. But any filing at this time would be premature in most cases. A small business has the best chance of survival when it has formulated a business plan based upon a realistic budget and cash-flow projections. In light of the uncertainty regarding the timing of a full “reopening” of the economy, it is difficult, if not impossible, to formulate realistic projections.

Notwithstanding the foregoing, a small business owner would be well-served to understand its bankruptcy options at this time as a part of its long-term planning process. The recently revised Small Business Reorganization Act (“SBRA”) has decreased many of the burdens faced by a small business in bankruptcy.

More information concerning the SBRA may be found HERE.

For more support and information relating to COVID-19, please visit the Kerr Russell COVID-19 Resource Center. If you have questions relating to this article or other business law matters, please contact a Kerr Russell attorney.

Jason W. Bank is the chair of the firm’s Bankruptcy and Restructuring department. He focuses his practice in the areas of commercial bankruptcy, out-of-court workouts, corporate restructuring and creditors’ rights. Jason has successfully guided numerous businesses through out-of-court restructurings and Chapter 11 reorganizations. He has negotiated resolutions of complex financial issues and debtor-creditor disputes and achieved consensual restructurings while avoiding bankruptcy or litigation.

 

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