Is your small business at risk of going out of business? You are not alone. According to Inc Magazine, the rate of small business bankruptcies is increasing in the United States. Inc Magazine recently published an article titled “Small Business Bankruptcies Are Accelerating.“ You can find the link here:
In the article, the author suggests that the reasons for these bankruptcy filings are myriad. They include :
- Tight credit environment
- Heightened interest rates (from the federal reserve)
- High labor costs
- Supply chain issues
- End of pandemic relief
- Greater competition from other small businesses
- Other issues
WHAT SHOULD YOU DO IF YOU THINK YOUR BUSINESS IS AT RISK?
Are you a small business owner whose small business is at risk of going out of business for any of the above, or other reasons? Are you contemplating your options? The Inc article advises small business owners to first of all try to negotiate with their creditors and work something out before they “run out of money.” At the same time, the author also pointed out that there is no shame in filing for bankruptcy. Indeed, for some small businesses, filing bankruptcy can mean a new lifeline because they can restructure their debts to a more manageable situation, and save their business. That is, bankruptcy does not necessarily have to mean that the business is over and done with. It just means that you can reduce or eliminate your unsecured debts in order to save cash and restore stability in your business.
But let’s say that you decide your only option is to file for bankruptcy. Under the US Bankruptcy Code, businesses can file for a Chapter 11 bankruptcy but there is a new section of the Bankruptcy Code – Chapter V – which is a subchapter of Chapter 11, which may be even more advantageous for some small businesses. Indeed, Chapter V of the Bankruptcy Code was promulgated specifically for small businesses in 2020 to make it easier for small businesses to benefit from a restructuring of their debts, and potentially save their businesses. The working name for it is a “subchapter 5 bankruptcy.” This chapter of the Code allows small businesses that meet certain prerequisites to unload unsecured debts they incurred within the context of their business dealings. Accordingly, these are the 3 prerequisites that small businesses must meet in order to file a Chapter 5 bankruptcy under the current Federal regulations. The small business owner must:
- Be pursuing business activities relevant to the filing;
- Have 50% of their business debts coming from their business activities;
- Have less than $7,500,000 non-contingent debts*.
*Non-contingent debts are debts that are owed without any additional event occurring. So, for example, your light bills are non-contingent debts. You owe the electricity you have consumed even if you have not yet received the bill from the electric company. Note that non contingent debts can be re-organized in a Chapter 5 re-organization bankruptcy proceeding, as a general rule, so long as the amount in question is below $7,500,000.
ADVANTAGES OF FILING A CHAPTER V BANKRUPTCY
The main advantage of filing a Chapter V bankruptcy is that it allows the filer to retain more control than in other types of bankruptcies because it gives exclusive control of the debt restructuring plan to the filer. But it is even more than just that. According to Lane Law firm in Texas, “A Subchapter 5 business bankruptcy is more streamlined, faster, and is far less expensive than a typical Chapter 11 bankruptcy. Additionally, a Subchapter 5 bankruptcy puts the business owners firmly in the driver’s seat as they get to keep their equity, maintain control, and are the only party who can submit a debt restructuring plan.”
The cost of filing a chapter V bankruptcy—that is, the lawyer’s fees—can also be significantly less expensive than filing a Chapter 11. Both a Chapter 11 and a Chapter 5 bankruptcy is more complicated and expensive than filing a Chapter 7 or even a Chapter 13. The latter chapters are usually not available to business filers, although a DBA (doing business as) filer might be able to qualify for a Chapter 7 depending on the situation. Normally, the chapters available to business filers are Chapter 11 and now, Chapter 5. The legal fees for a Chapter 5 bankruptcy are usually well under $25,000, while a chapter 11 can cost over $50,000 under certain circumstances.
Deciding whether it is time to consider filing bankruptcy can be a stressful thing for many small business owners. If they are unfamiliar with the Bankruptcy Code, they may even mistakenly think that filing bankruptcy means the end of their business. This is not necessarily true. In fact, it is quite the opposite. Filing a chapter 5 bankruptcy might be the beginning of the path to success for your small business. The takeaway is that if you feel that your small business in at risk of failing, don’t panic. Contact your creditors and try to work out a payment plan before you run out of money. And contact a bankruptcy attorney to get some good legal advice.