Effects from the unprecedented closure of all non-essential businesses as a result of Governor Cuomo’s executive orders, intended to slow the spread of COVID-19, are being experienced by businesses throughout the Albany area and Upstate New York. Real estate development, manufacturing, construction, hospitality, restaurants, and a host of other retail and wholesale businesses have been shut down and business owners are feeling the impact on cash flow, with many struggling to maintain payments to creditors while attempting to provide income to affected employees. These effects will likely continue for many businesses even as they begin to reopen after the restrictions are eventually eased.
Many lenders are working with their customers to extend payment terms during this initial period of disruption while business loan programs provided for or enhanced under the federal CARES Act (Coronavirus Aid, Relief, and Economic Security Act) are rolled out to borrowers. While some borrowers will be able to resume operating when the economy reopens or will find the necessary relief in government-backed loan programs, others will be more challenged because of financial issues that pre-dated the pandemic or because of lingering effects of the shut-down of the economy on their particular businesses. For these businesses, it may be advisable to consider bankruptcy options.
Recent bankruptcy legislation, along with several bankruptcy-specific provisions of the recently enacted CARES Act, may help businesses in Upstate New York and elsewhere recover from this period of economic and financial uncertainty.
Chapter 11 for Small Businesses
The Small Business Reorganization Act (the “SBRA”) took effect on February 19, 2020, adding Subchapter V to the Chapter 11 provisions of the Bankruptcy Code, with the intent to provide a more streamlined process for small businesses to reorganize their debts. Prior to enactment of the SBRA, businesses facing financial difficulties and attempting to reorganize under Chapter 11 had to contend with rules and processes often more suited to larger business concerns, such that a company with only one or a few shareholders or members and a small number of employees had to contend with the same statutory requirements as American Airlines or General Motors. While several amendments to the Bankruptcy Code over the years attempted to address this disparity, none were as far-reaching as the SBRA.
Specifically, for certain debtors with less than $2,725,625.00 in debt, the statute eliminated certain burdensome documents previously required to be prepared and filed with the Bankruptcy Court to propose a plan for payment to creditors and shortened the time period to file that plan with the Court. Similarly, small business debtors will not face the prospect of having a committee of unsecured creditors appointed in their cases and are not obligated to pay quarterly fees to the Office of the United States Trustee. These changes were intended to reduce the cost of reorganization to qualifying small business debtors and streamline the process to approve a plan for payment to creditors.
The elimination of rules requiring the consent of at least one class of creditors to a payment plan and prohibiting the company’s owners from retaining ownership unless they invested new money make Chapter 11 a more viable and attractive option for many business owners. Small business plans can propose repayment of a portion of debts over a period of three to five years, with debtors receiving a discharge of amounts unpaid either at the time the plan is approved or at the conclusion of the payment plan term.
Business owners who borrowed against the equity in their homes to finance their businesses can modify the terms of those mortgages, including reducing the interest rate, extending the maturity date or reducing the amount due based on the equity in the property securing the loan. The statute also provides for the appointment of a Subchapter V trustee to assist with negotiations between a debtor and its creditors to attempt to reach agreement on a payment plan for creditors.
Amendments to the SBRA under the CARES Act
The CARES Act was enacted on March 27, 2020 in response to the outbreak of the COVID-19 virus and accompanying pandemic. While the CARES Act enhanced or created a number of government-backed loans for small businesses, it also made several beneficial changes to Subchapter V of Chapter 11. In particular, it increased the debt limit for eligible businesses to $7.5 million, which greatly expanded the pool of potential businesses eligible to utilize the streamlined and less costly procedures under Subchapter V. At this point, the debt threshold reverts to the roughly $2.7 million limit one year from the enactment of the CARES Act. Congress could make further adjustments to the debt limit, but at this point that is not definite so businesses should not delay seeking advice on the efficacy of this relief on the assumption that the increase will be extended or made permanent.
Business owners who guaranteed some or all of a company’s debts and need to consider a personal bankruptcy filing also see some expanded relief under the CARES Act. Funds received from governmental programs to replace lost income are not included in the calculation to determine eligibility for filing for relief under Chapter 7 or Chapter 13, or for calculating disposable monthly income to determine the amount of monthly Chapter 13 plan payments.
For business owners already in Chapter 13 and whose plans were confirmed prior to March 27, 2020 and who are experiencing material financial hardship directly or indirectly as a result of the COVID-19 pandemic, the CARES Act allows those plans to be modified to provide for payment terms of up to seven years from the date the first payment under the confirmed plan was due. As with the increased debt limit under Subchapter V, these provisions revert to the pre-amendment terms of the statute one year after enactment of the CARES Act.
The wide-spread impact of the current economic shutdown will have long-term ramifications on businesses, even after restrictions on operating are eased or lifted. Supply chains and consumer economic activity will likely be slow in returning to pre-COVID-19 levels for some time. In turn, businesses throughout the Albany area and Upstate New York and across virtually all industries will experience the combined effects of extended interruption in business operations and reduced consumer demand. The attorneys at Nolan Heller Kauffman have decades of experience assisting businesses in restructuring their operations and debt, including utilizing bankruptcy and non-bankruptcy options, and are available to discuss these alternatives and help guide you through these unprecedented economic times. Please feel free to contact Justin A. Heller, Esq. by e-mail (firstname.lastname@example.org) or phone (518.432.3118) or Francis J. Brennan, Esq. by e-mail (email@example.com) or phone (518.432.3159) to learn more and discuss these options.