As businesses keep closing, can bankruptcy help keep them afloat?
The COVID-19 pandemic has been devastating in countless ways, but one of the most publicly visible consequences of the virus has been its impact on businesses. A quick look at various downtowns reveals empty storefronts and going out of business signs, and they represent just the tip of the iceberg. Many other businesses are struggling and even those without physical locations have succumbed to the economic downturn. In the six months between March and September of 2020, over 500 businesses filed for bankruptcy, and things have only gotten worse since then – though these numbers may not be as bad as they seem.
What many people misunderstand about bankruptcy is that bankruptcy is not synonymous with permanent closure. Rather, despite bankruptcy’s serious financial and legal consequences, it can actually help businesses avoid shutting their doors and offer added protections. As businesses continue to struggle, it’s important that they fully understand their bankruptcy options.
Closures – The Long Tail
Before exploring how bankruptcy can protect businesses that are in financial trouble, it’s important to recognize that the early statistics cited above – 500 businesses filing for bankruptcy – are just the tip of the iceberg. According to experts, early 2021 will likely see many more closures. These will include a number of additional store closures from businesses who filed bankruptcy in 2020, like J.C. Penney; meanwhile, credit experts consider stores like Party City and J. Jill considered to be a significant credit risk.
Why Consider Bankruptcy?
It makes sense that a business that is inevitably going to close would file for bankruptcy, since they’re already trying to deal with the consequences of overwhelming debt and a lack of profits. But why would a business file for bankruptcy while remaining open? Many people don’t understand this function of bankruptcy, though it’s at the core of bankruptcy’s legal function.
Unlike bankruptcy filings that are designed to support the financial needs of businesses that are planning to close, Chapter 11 bankruptcy is meant to help companies negotiate their debts so that they can eventually become profitable again. As bankruptcy attorney Rowdy Williams explains, “Chapter 11 bankruptcy is a powerful and underutilized tool, especially among small businesses. Because you don’t have to forfeit all of your assets, you might think of it as an opportunity for a fresh start with added oversight – exactly what many operations need in the wake of the COVID-19 pandemic.”
Reorganized And Renewed
Reorganization is another element at the heart of Chapter 11 bankruptcy, and its role cannot be understated. This clause means that businesses need to set their operations in order in a way that includes a plan to repay their debts, and that plan needs to be approved by its creditors. If accepted, however, companies then have some time to work on their plan without the pressure of debt collection hanging overhead.
Because so many businesses either filed for bankruptcy or came very close to such an outcome during 2020, it was hard to keep up with each operations’ standing, and there were some bad actors in the bunch. These include businesses like Stein Mart that knew they were on the verge of closing and still accepted Payroll Protection Plan funds; they closed less than two months later, shuttering 280 stores and leaving 9,000 people unemployed. PPP funds would not have saved them, nor would Chapter 11 bankruptcy.
Chapter 11 bankruptcy is a tool for businesses that have a chance of recovery, and those who misuse it will ultimately still shut their doors and have to contend with their debts. As we stand on the precipice of an economic recovery, though, there are plenty of businesses that could make a recovery with a little time and support. These are the companies that could benefit from Chapter 11 bankruptcy, and they shouldn’t overlook the process’s potential benefits.