I have been meaning to make a post about Chapter 11 Bankruptcy and the small business PPP loans but I have so much to say that my mind was getting cluttered trying to figure out how to start. I have to thank Kathryn Jump founder and CFO of CertificateOfService.com for helping me to get some clarity. I think the best way to introduce this topic is to define the issue and then outline the basic ways that one can get help. The basic issue here is that small business have been crippled in the current COVID-19 Pandemic. Restaurants are being hit the hardest and continued lock down requirements make it even more difficult to survive. Other small businesses have also had their share of hard times in the past 7 months. There was some relief early on with the PPP loans provided by the CARES Act and those funds helped many small business survive the beginning stages of the pandemic, but we are nowhere close to the end of the restrictions and the small business PPP loans have run out. So what happens now?
Purpose of a PPP Loan
The PPP loans were designed to help small businesses maintain their monthly expenses when there was little to no income. The majority of these expenses are payroll, rent, and utilities. The PPP loans provided an influx of “income” when small businesses were not able to get that income in the ways that they had done in the past (in some cases for decades). Most small businesses that were careful with the PPP funds were able to examine their monthly budget and spread the money out over time in an attempt to outlast the shortfall of income. One of the problems is that the PPP funds were not designed to cover any debt service that the small business may have been required to do prior to receiving the PPP loan. This means that any small business that survived the past 7 months and also regained its income stream now has to stare high interest debt in the face. In many cases, small businesses are current with payroll, rent, and utilities but severely in default in other debt categories. Without a concrete plan of attack, these same small businesses are headed for disaster even after having successfully navigated the pandemic. Chapter 11 Bankruptcy can be a much needed lifeline at this point in the pandemic.
So you Survived The Pandemic…Now What?
Unfortunately, many small businesses did not survive the past 7 months even with the PPP assistance. If you are the owner of one of those businesses you did not necessarily do anything wrong. Some industries had simply not rebounded in order to allow for an income stream to begin again. Other small businesses have rebounded but are now facing a mountain of high interest debt. Chapter 11 Bankruptcy can be a huge help in this situation.
If you survived the hit to your income over the last 7 months and are reading this blog post looking for a way to survive the future, congratulations. There is hope in this situation through a Chapter 11 Bankruptcy filing. Chapter 11 Bankruptcy is traditionally used to help a small business that is facing a lot of high interest debt reorganize and keep itself running. We are living in unprecedented times where businesses have access to a lot of credit and may have had a way to service that debt until the pandemic hit. As long as your business has gotten to this point and is able to pay its month to month expenses without further loans or assistance it can file for Chapter 11 Bankruptcy and qualify for a discharge of a lot of this debt. One of the biggest challenges to this is a barrier called the absolute priority rule which in essence forces a business in Chapter 11 to repay all of its creditors in order to get a discharge. There are exceptions to this rule that my office has become very familiar with and uses quite often. However, as Kathryn Jump pointed out, there is another way to confront this for a small business and that is filing for Chapter 11 under Subchapter V. This kind of filing does away with the absolute priority rule for a small business and allows for payment of less than 100% of the debt. Subchapter V comes with its own set of challenges and my office always makes sure to explore all of the options with our small business clients.
As with any Chapter 11 Bankruptcy in Chicago, this is a difficult but crucial decision. We encourage you to reach out to us for a free consultation to discuss all of the options under traditional small business Chapter 11 and also Subchapter V.