The coronavirus pandemic and lockdown forced nearly a third of all small businesses in the U.S. to close. Some have shut down for good.
Those that remain must navigate a host of restrictions, including limits on customers, who themselves may be reluctant to get a haircut, dine out or engage in other activities that put them near others.
What these businesses need most is time – breathing space that temporarily freezes expenses while letting them continue to operate and figure out a plan to keep going. In many cases, that means declaring bankruptcy.
While bankruptcy is often associated with going out of business, it’s also meant to help viable companies find a path back to profitability. The problem is bankruptcy law doesn’t provide enough time to do this in a pandemic. Health concerns will likely subdue economic activity for a while, even as bills and other costs pile up.
There’s a way to fix this.
What these businesses need most is time.
Small businesses make up roughly 90% of all private companies and account for nearly two-thirds of all new jobs created in the U.S.
The closures of so many have contributed considerably to the historic levels of unemployment.
To save small businesses, Congress created the Paycheck Protection Program. But businesses must use most of the proceeds for payroll. Companies still have to pay rent, utilities, insurance premiums and a host of other ongoing costs. While some have been able to defer these expenses, they can’t do so forever. Businesses will eventually be forced to deal with unpaid, unmet obligations.
Some businesses may have enough savings to ride out the pandemic or can access fresh capital from owners, who often wipe out their personal savings in the process. But for many others, the crush of past-due expenses will threaten their ability to continue to operate, even if the business model is sound.
While bankruptcy usually serves as an organized way to close down permanently, it can also be used to hold off creditors while a company restructures its debts and continues operations under Chapter 11. Upon filing, an automatic stay on collection efforts goes into effect, which prevents eviction, foreclosure or repossession of inventory and equipment while the business comes up with a plan.
For many businesses, however, the issue is not a backlog of debt but a lack of immediate revenue to make short-term obligations. And there’s no knowing how long this will last.
Until recently, very few small businesses were able to reorganize successfully under Chapter 11, opting instead to find alternative solutions under state law or to simply go out of business altogether. Last year, Congress made it a little easier for companies to navigate bankruptcy successfully, by reducing the regulatory burdens and offering more support. But small businesses still don’t have what they need most: time.
In bankruptcy cases, debtors are required to adhere to strict time frames. Upon filing, debtors have 90 days to submit a plan for profitability to the court, under which they can repay most creditors slowly over several years.
There’s an important exception for rent payments. If debtors wish to retain their leases, they need to pay rent on time after filing – and have to repay all past-due rent in full as soon as their plan is confirmed. While there’s some wiggle room with other past-due bills, there’s a hard deadline with rent, which can be the largest expense of all.
A recent proposal delivered to Congress recommended giving small businesses extra time during the bankruptcy process.
The proposed changes would freeze bill collection, but also freeze court proceedings for the next six months. This recommendation would encourage landlords to negotiate with debtors and might afford such businesses the time and space they need to remain the backbone of the U.S. economy.
Brook Gotberg is an associate professor of law at the University of Missouri Columbia. Paige Marta Skiba is an economist and law professor at Vanderbilt University. Distributed by The Associated Press.
