The COVID-19 outbreak and ensuing pandemic has wreaked havoc on the global economy for more than a year, and U.S. businesses across all sectors are still feeling the squeeze, while others are barely surviving the challenges posed by the coronavirus crisis. For many businesses burdened by overwhelming debt due to COVID-19, the best option for the owners is to file for bankruptcy and either terminate the business altogether or restructure their finances and repay creditors over time under a financial plan that reduces their expenses and frees up assets. If you are a business owner considering filing for bankruptcy due to COVID-19, a bankruptcy attorney can help you review your options and choose the bankruptcy chapter that delivers the best possible results for your specific financial situation. Contact us today to learn more about filing business bankruptcy during the coronavirus pandemic.
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Types of Bankruptcy for Businesses
As the longer-lasting effects of coronavirus-related unemployment and business closures continue to unfold, bankruptcy filings could soar this year. Business owners seeking bankruptcy relief typically file under Chapter 7 or Chapter 11 of the U.S. Bankruptcy Code, which is the federal law governing the procedures that individuals and businesses must follow in filing bankruptcy. For business owners who want to wipe out their debts and get a fresh start, Chapter 7 bankruptcy could help. The biggest downside to Chapter 7 bankruptcy for businesses is that a bankruptcy trustee liquidates the business assets and distributes the proceeds to creditors. In most cases, that means owners do not have the option of remaining in business. Struggling business owners who prefer to shut down their failing business may find that Chapter 7 bankruptcy offers a faster and simpler way out.
Compared to Chapter 7, a Chapter 11 bankruptcy filing may be a more attractive option for business owners who want to get their debt under control, avoid liquidation, and continue their business operations during COVID-19. Under Chapter 11, debtors may propose a plan of reorganization to keep the business open and pay back creditors over time. However, filing a Chapter 11 bankruptcy means negotiating with creditors and creating a reorganization plan that a committee of creditors can agree to, which can be a costly, complex, and time-consuming process. As a result, Chapter 11 bankruptcy has historically been a more useful debt-relief tool for large corporations. However, due to recent changes to bankruptcy laws made during COVID-19, Chapter 11 bankruptcy may be a good option for some struggling small businesses as well.
Chapter 13 bankruptcy is another type of reorganization bankruptcy that is typically reserved for individuals. However, sole proprietors seeking relief from business debt due to COVID-19 may be able to file under Chapter 13 since the law does not distinguish between sole proprietorships and their owners. In other words, the business in this case is merely an extension of the individual.
Recent Changes to Business Bankruptcy Laws
The cost and inefficiency of Chapter 11 bankruptcy as a debt-relief tool for small businesses led to the introduction of the federal Small Business Reorganization Act of 2019 (SBRA), which added a provision to the U.S. Bankruptcy Code called Subchapter V of Chapter 11. The hallmark of Subchapter V is that it eliminates the creditor committee requirement of Chapter 11 bankruptcy and appoints a bankruptcy trustee to monitor the debtor’s payments, giving small businesses a more affordable and efficient debt-relief solution under Chapter 11, and giving small business owners more control over their business operations during the bankruptcy proceeding.
The SBRA sought to “expedite and reduce the cost of bankruptcy for small business debtors to reorganize their debts and save their businesses,” stated a Justice Department press release issued in February 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law at the beginning of the coronavirus pandemic on March 27, 2020, expanded the bankruptcy relief provisions established by the SBRA through March 27, 2021, thereby making it easier for small businesses in need of a debt-relief solution due to COVID-19 to qualify for a Chapter 11 bankruptcy case. In March 2021, President Biden signed into law the COVID-19 Bankruptcy Relief Extension Act, which extends those bankruptcy relief provisions through March 27, 2022.
Find Out Whether Bankruptcy is Right for Your Business
Plenty of business owners across the U.S. continue to struggle under the burden of debt brought on by the COVID-19 crisis and are wondering if bankruptcy is the answer to their heavy debt. When it comes to filing for business bankruptcy due to COVID-19, there is a lot you’ll have to be aware of in terms of what debt-relief options are out there and how each option can benefit you financially. For instance, if you are a sole proprietor and you file under Chapter 7, you may be able to have your personal debts discharged along with your business debts. And if your business debt exceeds your personal debt, you won’t have to worry about passing the means test, which determines whether you qualify for Chapter 7 bankruptcy. Unfortunately, businesses that have already shut down are not eligible for debt relief under Chapter 7 of the Bankruptcy Code. That means most small businesses that were forced to close their doors as a result of the coronavirus pandemic will not qualify for a Chapter 7 discharge.
Contact Us for More Business Bankruptcy Help
Filing bankruptcy can be a practical debt-relief strategy for reducing or eliminating certain types of debt, and it can help business owners facing significant debt in the wake of the COVID-19 pandemic get their financial obligations under control. Unfortunately, many people burdened by debt they can’t afford to pay hold back from pursuing bankruptcy as a debt-relief option out of fear, shame, guilt, or some sort of moral obligation to repay their debts. It is important to understand that bankruptcy laws in the U.S. were written specifically for the purpose of helping debt-strapped individuals and struggling businesses get a fresh financial start. With the help of a seasoned bankruptcy attorney, you can learn more about the various ways you can eliminate or repay your debt under the protection and supervision of the bankruptcy court.