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3 Things to Consider When Your Small Business Can’t Pay its Debts

On Behalf of | Oct 13, 2020 | Business & Commercial Bankruptcy

As a result of the pandemic many small businesses have shut their doors and many more are struggling to survive. A significant number of small businesses continue to accumulate debt and many cannot meet the day to day expenses necessary to continue operating. Small businesses owners must decide whether to try to save their struggling business or to close their doors permanently. The following are three things that small business owners like you should consider when facing the difficult decision of what’s next.

1) Negotiate with Your Creditors

For many businesses government assistance and PPP funds have been exhausted. If you fall into this category it may currently be impossible to pay all of your bills on time on an ongoing basis. As time passes, landlords and creditors may not want to wait to get paid and will file lawsuits to get paid. Once the creditors enter judgments it may be too late to save the business.

As soon as possible you should contact your landlord, lenders and other creditors to see if they will make payment arrangements based upon your available income. If possible, try to make your creditors your partner and not your adversary. At this time, and depending on the creditor or landlord, they may be willing to negotiate to get some payment, as they too may be struggling. Negotiating with your creditors may give you the time you need to rebuild your business and ultimately pay off the debts either in full or in a compromised amount.

2) Explore the Possibility of a Small Business Bankruptcy Reorganization

If your creditor negotiations are not successful, you may be able to save your business by filing a small business bankruptcy. The Small Business Reorganization Act (“SBRA”) was passed by the U.S. Congress in August of 2019 and became effective on February 19, 2020. The SBRA can often provide a lifeline to help a struggling business to survive.

  • What is the SBRA?

The SBRA created a more efficient and less costly process for small businesses to reorganize under Chapter 11 of the United States Bankruptcy Code. The SBRA, also known as Subchapter V of Chapter 11, removed many barriers that had prevented small businesses from reorganizing in bankruptcy.

  • SBRA Debt Limits

As enacted, the SBRA applied to businesses with debts not exceeding $2,725,625. The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) increased the debt limit to $7.5 million. This increased debt limit is temporary and currently expires one year from March 27, 2020 when the debt limit returns to $2,725,625.00.

  • How Does the SBRA Work?

The SBRA has made it easier, quicker and less costly to reorganize your small business through bankruptcy. In a Subchapter V Bankruptcy, a Plan is filed providing for catching up on missed rent, mortgage, equipment leases and/or secured bank debt. The Plan also provides for the payment of some or all of the amounts owed to vendors or other unsecured creditors. The Plan must provide for payments over a period of three years. If necessary, the Plan can be extended to up to 5 years. The Plan payments are made from future business income.

The Bankruptcy Court must approve the Plan. In certain cases, the Court can approve the Plan even if the creditors do not agree with it. After the Plan is completed all remaining business debts are discharged. Discharged debts are no longer owed.

  • What Businesses Can Benefit from the SBRA?

A Small Business bankruptcy may be a viable option for businesses that can meet ongoing obligations but need time to address past due obligations including rent and loan payments. It may provide the only opportunity for small businesses facing the threat of a judgment for eviction to stay in its premises and continue ongoing operations.

3) Close Your Business?

If all efforts to keep your business open have failed, the only remaining option may unfortunately be to close. The following are 4 possible ways to do so.

  • Surrender Collateral to Secured Lender

If all of your business assets are pledged to a bank to secure a loan, contact the lender and surrender the assets. Any other debt will remain against the insolvent business unless the owner has taken on the debt personally.

  • Pursue an Assignment for the Benefit of Creditors

An Assignment for the Benefit of Creditors (ABC) is a tool that is often used to accomplish an orderly liquidation of a business that has valuable assets with little to no secured debt. An ABC is similar to a bankruptcy liquidation, but is governed by state rather than federal law. The ABC process begins by the business executing a deed transferring all of its assets to the Assignee. Once the Assignee records the deed, the assets are liquidated, creditors are invited to submit claims based on the outstanding debt owed, and, ultimately, a distribution is made on the creditor claims. Other than signing the deed and cooperating with the Assignee, the small business owner has no further obligations regarding the business.

  • Close the Doors and Walk Away

If the business has no assets and there are insufficient funds to continue operating, the business can just be shut down. The business owner is not obligated to pay the business debts unless they have personal liability for the debts which is often obtained by a personal guarantee. Creditors whose claims are not paid may pursue collection efforts against the business, but they will not receive any payment.

  • Chapter 7 Bankruptcy

Only a business which is a sole proprietorship should consider filing a Chapter 7 bankruptcy because only individuals can obtain a Chapter 7 discharge. Corporations and LLCs cannot. The discharge is the Court Order which eliminates debt. Since business entities are not entitled to a Chapter 7 discharge, there is no reason to pursue that process.

Contact Levitt and Slafkes Today to Get Help with Your Small Business Debt.

If you are struggling with debt for your small business and don’t know which road to take, give us a call today to schedule a free consultation and discuss your options. To make an appointment call us at 973-323-2953 or fill out our contact form.