Feds give a bankruptcy lifeline to small businesses hurt in pandemic
In recent weeks, we have seen our daily lives thrown into turmoil, we have worried about our health and the health of our friends, families, and communities, and we have seen the economy take a serious turn for the worse. Small businesses are particularly hard hit. With little warning, entire areas of economic activity have shut down nearly completely, with an uncertain timeline ahead. Many small businesses are wondering not when but if they will be able to resume business as usual at some point down the road.
For now, small businesses are understandably focused on outlasting the freeze in most commercial activity. But we should also take stock of the tools that will be available when the time for rebuilding and restarting comes. Congress recently passed a stimulus bill that, in addition to providing an eye-popping number of $2.2 trillion in relief, brings some additional hope for small businesses: It permits more of them to access a promising new path to dealing with their debts in a Chapter 11 bankruptcy. In the hard weeks and months to come, small businesses in the Commonwealth should consider this new potential road to recovery.
Traditionally, small business owners have avoided bankruptcy reorganization because it can be long and expensive. In addition, owners usually either have to find more money to invest themselves or have to give up the economic value of the business to their creditors. As a result, owners tend to keep their struggling businesses limping along past the point where they can be rescued. Eventually, all too often, the businesses collapse and fade away.
In a move that looks remarkably timely in retrospect, Congress passed the Small Business Reorganization Act late last year. The Act went into effect in February. The Act streamlines the bankruptcy process for small businesses. And it will let many owners keep their businesses as long as they pay the profits to their creditors for three years. For those years, they can make “expenditures necessary for the continuation, preservation, or operation of the business,” which should include reasonable salaries for the owners who are also, often, the most important employees of small businesses.
Of course, the law is full of important limitations and details, and any business owner will have to talk to a bankruptcy lawyer to figure out whether this relief would help in their situation. I was skeptical of the law when passed; under normal circumstances, there are reasons to think that its economic effects will be a mixed bag at best. But in the extraordinary times in which we now find ourselves, the Act may provide real and much-needed relief to many businesses that can turn a profit but that find themselves burdened by insurmountable debt.
One frequent criticism leveled against the original Act was that small businesses had to be very small to qualify for it—with basically no more than $2.7 million in debts. But in the CARES Act passed last week, Congress raised that limit to $7.5 million. This will allow many more businesses to benefit. The law is set to revert to the lower limit in a year, however, which may not be enough time for all businesses who need this relief to get it. If the deadline remains in place, small business owners interested in relief should remember to act quickly. Seeking advice sooner than later may be good advice in any case, because the paths to financial relief tend to narrow over time, as debts accumulate.
No doubt about it: Our economy has a challenging time ahead. But small businesses have one more tool in their toolbox thanks to the Small Business Reorganization Act and the CARES Act.
Christopher Bradley is Assistant Professor of Law at the University of Kentucky J. David Rosenberg College of Law. He teaches business, bankruptcy, commercial, and consumer law.