Pandemic Bankruptcy: What To Do If Your Business Is On The Brink

by / ⠀Startup Advice / November 19, 2020
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2020 has been a tough year for businesses. Though the year opened with a generally strong economy, the novel coronavirus pandemic caused widespread shutdowns and, as these have persisted, pushed some businesses to close entirely. On the other hand, many companies have successfully shifted their operations, and a whole group of creative entrepreneurs have filed for business licenses, spotting new, unmet needs in the midst of the pandemic. Regardless of industry, though, it’s a strange time to own a business, and with no end to the pandemic in sight, a growing number of owners are considering the possibility of filing for bankruptcy.

If your business’s finances are tight and you’re worried about meeting your obligations, it’s important to understand all of your options. Filing for bankruptcy can take a number of different forms depending on your financial circumstances and your hopes for your professional future. This is what you need to know to get started.

There Are Many Types Of Bankruptcy

Bankruptcy is hardly a one size fits all process, so before you decide whether or not you even plan to file, it’s important to know what options you’ll have available to you. For the typical small, sole proprietorship, this means choosing between Chapter 7 and Chapter 13 bankruptcy. 

Chapter 7 bankruptcy is a good plan if you went a totally clean slate because you have few assets and are far behind on your expenses. That’s because Chapter 7 bankruptcy doesn’t require a repayment plan, and it can even be used to discharge both business and personal debts. With Chapter 13 bankruptcy, on the other hand, businesses negotiate a repayment plan with their creditors and are able to reorganize their operations. Chapter 13 bankruptcy and similar versions for large corporations explain why you may read about a business that filed for bankruptcy yet continued to operate; they simply reorganized their business.

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The Pandemic Created New Options

Chapter 7 and Chapter 13 bankruptcy are standard filing options available to businesses regardless of other economic circumstances. However, since the start of the pandemic, the US government has created additional options, along with programs designed to help keep companies afloat, such as the Paycheck Protection Program, which incentivized keeping employees on payroll despite shutdowns and reduced business. In a similar vein, the CARES Act modified the previous year’s Small Business Reorganization Act to allow more small businesses to qualify for Chapter 11 bankruptcy.

What makes Chapter 11 bankruptcy different from Chapter 7 or Chapter 13 filings? In principle, this model is more like Chapter 13 because it is founded on a repayment plan and because it enables the business in question to reorganize its structure in hopes of continuing to operate. Additionally, Chapter 11 filings need to be approved by a judge. Prior to its modifications under the CARES Act, though, Chapter 11 bankruptcy was really only available to larger corporations, privileging their ability to continue operating, but now small businesses have more continuity options.

Continuity Comes With Challenges

Small businesses historically have opted for Chapter 7 bankruptcy because it freed them of obligations; Chapter 7 bankruptcy is the closest thing to a blank slate that small business owners have access to. On the other hand, per subchapter V, businesses that file for Chapter 11 bankruptcy are required to contribute all of their disposable income to paying their creditors for the next three to five years. That means these businesses can’t build up any additional personal or professional security during this period as everything above living and operational expenses must be paid toward their debt.

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Bankruptcy is always a possibility for small businesses, as is simply shutting down. That’s because, as optimistic as every owner would like to be, operating a small business is challenging and it’s rarely profitable during the first few years. At the end of the day, then, your goal should be to make the best choice for yourself, your employees, and your business, and as frustrating as it may be, sometimes filing for bankruptcy is the best choice.

About The Author

Becca Williams

Becca Williams is the editor of SmallBizTechnology.com.

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