Business owners around the country have faced unprecedented financial challenges over the past two years. In such cases, it is important to be able to envision pragmatic solutions to insolvency. These may involve debt restructuring or even liquidation in today’s volatile marketplace.
Fortunately for small businesses, there are relief options available. Working with an experienced bankruptcy attorney who is well versed in the continually evolving laws can provide options for businesses that are striving to achieve financial stability.
Types of bankruptcy filings
Small businesses have two basic bankruptcy options – Chapter 7 or Chapter 11 – under the Federal Bankruptcy Code.
Chapter 7
As with personal bankruptcy filings, Chapter 7 affords small businesses the possibility of debt forgiveness and liquidation to attain solvency when they are beyond the stage to be able to reorganize.
With this filing, a court-appointed trustee oversees the liquidation of non-exempt assets to pay off debt in the order of absolute priority. In this hierarchy, the repayment of secured debt such as collateral loans takes precedence over unsecured debt, such as is due to bondholders and shareholders with preferred stock. Once all assets are sold, the remaining debt is discharged.
Chapter 11
In a Chapter 11 filing, on the other hand, the debtor will remain in possession, acting as trustee as a restructuring of the repayment of debt is negotiated with creditors. The plan, once agreed upon by all parties, is approved by the court. The debtor will oversee the reorganization of the business while it is in operation – and may even borrow new money with the court’s approval.
With this filing, the debtor agrees to pay off at least a substantial part of the debt over a three- to five-year period in order to become solvent once more. It is a more complex and expensive type of bankruptcy filing, and it is used most often by partnerships, limited liability companies and corporations.
Is there relief under the CARES Act?
Under the CARES Act passed in March of 2020, Congress raised the debt ceiling under Subchapter V of Chapter 11 to $7.5 million. This provision was then extended until March 27, 2022. Many businesses were able to take advantage of this higher debt ceiling, and the American Bankruptcy Institute reported that Subchapter V cases were receiving more cost-effective, higher and speedier plan confirmation rates under the revised provisions.
While this provision has since expired, new legislation has been introduced to make the CARES Act amendment permanent. We are monitoring the situation and will provide updates on this blog if the legislation passes.