Bankruptcy on the Rise

COVID – RECESSION – BANKRUPTCY

Many small businesses will not be able to survive without relief.

Everyone keeps telling me we are not in a recession and things are getting better. I have contended for over a year now that we are in a recession, and we are not anywhere close to a recovery. Below I touch on small business and the increasing rate of bankruptcies that are devastating small business owners. Many small businesses are walking dead and just don’t know it yet.

The new bankruptcy rule Subchapter V filings is a tool introduced by the Small Business Reorganization Act of 2019 to help small businesses restructure.

According to the most recent research results, the filings and success rate of the new Subchapter V bankruptcies varies depending on the source. Here are some key findings:

·?????? Subchapter V bankruptcy filings, which most small businesses now use, are running above last year's level, according to the American Bankruptcy Institute. As of October 2023, there were 1,659 Subchapter V filings, compared with 1,553 for the full year earlier.

·?????? Approximately 20% of Subchapter V cases filed between February 19, 2020, and September 30, 2020, have been confirmed. This confirmation rate is no less than six times higher than the percentage for small business Chapter 11 cases that did not proceed under Subchapter V during the same period.

Chapter 11 bankruptcy prior to the adoption of Section V was the primary option allowing businesses to restructure their debt and continue operating. However, it is a complex and expensive process, and the success rate is relatively low. Here are some key findings from the search results:

·?????? The success rate of Chapter 11 bankruptcies varies widely, ranging from 7.4% to 59.2% among bankruptcy judges who handled at least 200 Chapter 11 cases.

·?????? Studies vary, but the success rate is probably no higher than 10% to 15%.

·?????? Less than 10% of Chapter 11 filings have been successful.

·?????? Chapter 11 is considered a business, or commercial, bankruptcy for a reason: It tends to be more flexible, and therefore more complicated and expensive to execute, than Chapters 7 and 13 bankruptcies, which favor individual (or spouse-and-spouse) filers.

·?????? Chapter 11 is not a cheap or easy refuge. Reorganization bankruptcies have a lot of moving parts and can cost far more and take vastly longer than the more straightforward, final remedy of a Chapter 7 liquidation.

Chapter 11 bankruptcies are relatively slow, and the process is complex and expensive. Secured creditors prefer liquidation over reorganization in bankruptcy because they are first in line to receive payment from the sale of the debtor's assets.?In a liquidation, all the debtor's assets are sold, and the proceeds are distributed to creditors based on a pre-determined priority order. Secured creditors are first in line because their claims over assets are often secured by collateral and a contract.?On the other hand, in a reorganization, the debtor proposes a plan to keep its business alive and pay creditors overtime.?This means that secured creditors may have to wait longer to receive payment, and there is a risk that the debtor may not be able to fulfill its obligations under the plan.?

It is important to note that the success rate of Subchapter V bankruptcies may be impacted by a variety of factors, including the size and complexity of the business, the amount of debt owed, and the willingness of creditors to support the reorganization plan. Additionally, the success rate of Subchapter V bankruptcies may change over time as more data becomes available.

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Bankruptcies cause a ripple effect in the business community, affecting not only the bankrupt company but also other businesses in the supply chain. When a company goes bankrupt, it can lead to a domino effect that affects other businesses in the industry, especially those that are closely linked to the bankrupt company. For example, if a supplier goes bankrupt, it can cause delays in production and delivery for other companies that rely on that supplier.

The impact of bankruptcies can be particularly severe during a recession, as businesses large and small face declines in sales and profits. Recessions can curb credit access, slow collections, and spur business bankruptcies. Smaller businesses are particularly vulnerable to spikes of Chapter 11 bankruptcies associated with past recessions.

In conclusion, bankruptcies can have a ripple effect in the business community, affecting not only the bankrupt company but also other businesses in the supply chain and even the global economy.

Small business bankruptcies are increasing, with Subchapter V filings outpacing those from the previous year. Subchapter V is a new tool, a simpler and more cost-effective way for small companies to reorganize their debts and get back on their feet. However, bankruptcy, through Subchapter V or otherwise, may not be the best move for every struggling business. Knowing whether it's the right move for a business can mean the difference between a successful repositioning or an epic failure. The debt limit for Subchapter V filings temporarily rose to $7.5 million, up from $2.7 million, through at least June 2024. This deadline may influence business owners who not sure but are afraid of missing out on the option. Here are some potential next steps for business owners to consider:

·?????? Assess the situation: Business owners should evaluate their financial situation and determine whether bankruptcy is the best option for their business.

·?????? Consider alternatives: Bankruptcy may not be the only option for struggling businesses. Business owners should consider other alternatives, such as negotiating with creditors or seeking financial assistance from government programs.

·?????? Consult with professionals: Business owners should seek advice from professionals, such as bankruptcy attorneys or financial advisors, to help them make informed decisions about their financial situation.

·?????? Understand the process: Business owners should educate themselves about the bankruptcy process and what it entails, including the potential consequences and benefits.

·?????? Develop a plan: If bankruptcy is the best option, business owners should develop a plan for how they will reorganize their debts and get back on their feet. This may involve working with creditors to negotiate payment plans or selling assets to pay off debts.

According to the most recent research results, the trend in Subchapter V bankruptcy filings is that they are increasing. Here are some key findings:

·?????? Small business bankruptcy filings under Subchapter V increased 81% year-over-year from April 2022 to April 2023, according to Epiq Global. The increase is due in part to the increased debt limits that Congress extended in June 2022, bringing the debt limit back up to where it was under the CARES Act at $7.5 million, making Subchapter V available to a far greater number of debtors.

·?????? As of October 2023, there were 1,659 Subchapter V filings, compared with 1,553 for the full year earlier.

·?????? Subchapter V bankruptcy filings, which most small businesses now use, are running above last year's level, according to the American Bankruptcy Institute.

It is important to note that the trend in Subchapter V bankruptcy filings may be impacted by a variety of factors, including economic conditions, changes in bankruptcy laws, and the availability of other forms of debt relief.

Section V may be the answer for some but not all. A Section V reorganization is a type of bankruptcy that falls under Chapter 11 of the U.S. Bankruptcy Code, which is also known as the "reorganization" bankruptcy. It is a relatively new type of bankruptcy that was added to the code in 2019 to make reorganization bankruptcies more accessible to small businesses. Here are some key features of a Section V reorganization:

·?????? Continued business operations: Under a Section V reorganization, a business can remain operational while developing a debt reorganization and repayment plan that helps the business become profitable again.

·?????? Only a business owner may put forth a reorganization plan: In a Section V reorganization, only the business owner may put forth a reorganization plan, which ensures that the business owner must only agree to a plan that he or she feels is reasonable for their business.

·?????? The bankruptcy court can confirm a business reorganization plan without creditor approval: In a Section V reorganization, the court has the authority to confirm a business's plan, even if those creditors do not agree. This goes a long way to speed up the process.

·?????? Special trustee: In a Section V reorganization, a trustee will be named to monitor the business's operations. The trustee will also make recommendations to the court regarding confirmation of the reorganization plan.

·?????? Expenses paid in installments: In a Section V reorganization, the business can pay all of the administrative expenses over the length of the plan, rather than having to pay them all on the day the plan becomes effective.

The reorganization must offer creditors at least what they would have received had the business filed under Chapter: Creditors must receive as much under the plan as they would in a Chapter 7 liquidating case.

Business owners need to make a solid assessment with their advisors if a business can be saved or not. This will save everyone time and money.

Simplified Overall, a Section V reorganization is a simplified process for small businesses that are cashflow positive but having trouble paying their obligations. It offers a more cost-effective reorganization path than traditional Chapter 11 reorganizations and provides an enhanced ability on the part of the debtor to confirm a plan because it curtails some of the historical obstacles that creditors could exploit to keep smaller closely held debtors from getting over the reorganization goal line.

The Clock is Ticking. The length of a Section V reorganization can vary depending on the complexity of the case and the debtor's ability to develop a debt reorganization and repayment plan. However, there are some time limits set by the Bankruptcy Code that must be followed. According to the law, the debtor must submit a plan of reorganization within 90 days of the bankruptcy filing. Within 60 days of the filing, the bankruptcy court is expected to hold a status conference to assist with the resolution of the case. At least 14 days prior to the conference, the debtor is required to file a report detailing its efforts to attain a consensual plan of reorganization.

Subchapter V debtor must file a plan not later than 90 days after entering bankruptcy, unless the need for the extension is caused by circumstances “for which the debtor should not justly be held accountable.” The plan must be confirmed by the court if it gets the required votes and satisfies certain legal requirements. The debtor must make plan payments in an amount no less than its projected disposable income over the life of the plan, which can range between three and five years.?Overall, a Section V reorganization can take several months to a few years to complete, depending on the circumstances of the case. This is not a lot of time to get a plan together and still run the business, preparation in advance is critical.

The Downside If a plan of reorganization is not confirmed, the debtor may have to convert the case to a Chapter 7 liquidation bankruptcy or dismiss the case altogether.?In a Chapter 7 bankruptcy, the debtor's assets are sold to pay off creditors, and any remaining debts are discharged. If the debtor dismisses the case, the debtor will not receive the benefits of bankruptcy protection, and creditors may resume collection efforts.?However, if the debtor believes that the plan can be modified to satisfy the requirements for confirmation, the debtor may request additional time to modify the plan.?If the debtor is unable to confirm a plan of reorganization, the case may be dismissed or converted to a Chapter 7 bankruptcy.

Overall, a Section V reorganization can take several months to a few years to complete, depending on the circumstances of the case.

When considering a bankruptcy filing, it's crucial to assemble an advisory team that can provide expert guidance throughout the process. This team typically includes:

Your Team

·?????? Bankruptcy Attorney: A bankruptcy attorney is a specialist who can help you decide whether to proceed with a bankruptcy filing, advise on the type of bankruptcy to opt for (Chapter 7 or Chapter 13), counsel you on what property you might be able to retain, provide input on the tax consequences you will face, and advise you on whether you should continue making payments to creditors[3]. They should be familiar with both bankruptcy laws and the local laws of the court where your bankruptcy case will be filed.

·?????? Financial Advisors or Bankruptcy Advisory Services: These professionals provide strategic advisory to companies going through a bankruptcy filing. They offer services such as pre-bankruptcy strategy and planning, operational initiatives, action plans to address specific operational challenges, comprehensive communication programs for your company’s vendors, customers, and employees, and assistance with reporting compliance and the development of a plan of reorganization.

·?????? Accountants: Accountants can help determine the causes for bankruptcy and work with debtors to formulate a plan of reorganization. They can also assist in the reorganization of the company and in orderly liquidations and/or sales of the assets when the company cannot be saved as a going concern.

·?????? Bankruptcy Consulting Firms: These firms provide management teams with a third-party, objective point of view supported by their experience with insolvency. They can guide you throughout the insolvency process, helping to determine when a restructuring or turnaround is best accomplished by filing for bankruptcy protection or other court-supervised process.

The Court Team

·?????? The Judge A bankruptcy judge is a judicial officer of a United States district court who is appointed by the majority of judges of the U.S. court of appeals to which his or her district court is associated.?Bankruptcy judges preside over judicial proceedings related to bankruptcy.

·?????? U.S. Trustee: The U.S. Trustee Program, part of the Department of Justice, plays a significant role in bankruptcy cases. They supervise the administration of bankruptcy estates, take legal action to enforce the requirements of the Bankruptcy Code, ensure that bankruptcy estates are administered promptly and efficiently, appoint and convene creditors' committees in Chapter 11 business reorganization cases, review disclosure statements and applications for the retention of professionals, and advocate matters relating to the Bankruptcy Code and rules of procedure in court.

·?????? Creditors and Other Stakeholders: Creditors and other stakeholders also play a critical role in the bankruptcy process. They can include secured creditors, administrative creditors, priority unsecured creditors, and general unsecured creditors.

To Summaries It is a fact that bankruptcies will surpass the 2010 rates. In 2010 the bankruptcies were from the financial crisis hangover and now we are bracing for the hangover from the COVID crisis, soaring inflation, and interest rates.

It is important to note that Subchapter V bankruptcy is only available to small businesses that meet certain eligibility requirements. Working with an experienced bankruptcy attorney and team can help ensure that you accurately assess your eligibility for Subchapter V and navigate the bankruptcy process effectively.

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