Although Congress has allocated billions of dollars in coronavirus relief for small businesses, there are still expected to be a growing number of companies that file for bankruptcy.

The unprecedented shutdown of so much of the nation to enforce social distancing measures has closed hundreds of non-essential businesses. Business filings under Chapter 11 bankruptcy rose sharply in March, and many more struggling companies may be looking for relief through bankruptcy.

However, a change in federal law could mean many small businesses may be able to survive the pandemic if they file for bankruptcy. In February, the rules for Chapter 11 bankruptcy were changed under the Small Business Reorganization Act. The new Subchapter 5 changes Chapter 11 eligibility rules. Previously, only companies with under $2.7 million in debt could apply. Now, as part of the CARES Act, that threshold is raised to $7.5 million for one year so more businesses can be covered.

If your business is struggling financially due to the COVID-19 outbreak and you’re looking for possible solutions through bankruptcy, it’s important to understand that the laws have changed due to the pandemic, and it’s best to consult with an experienced bankruptcy attorney who is up to date on the most current changes.

How Has COVID-19 Impacted U.S. Bankruptcy Laws?

The coronavirus pandemic has hit the business community hard, with only businesses considered essential allowed to stay open. That’s left so many companies across dozens of industries reeling from being shut down for so long, with mounting debt and an uncertain future. 

Congress approved programs like the Paycheck Protection Program and Economic Disaster Injury Loans to keep these businesses alive. But despite that, small businesses throughout the country still face considerable financial hurdles. Federal relief will help some, but may not be enough, and many businesses may contemplate bankruptcy. 

Due to the recent change in federal law, bankruptcy could actually help many companies survive COVID-19 and the Stay At Home orders. The new law made it easier for small businesses to access Chapter 11 bankruptcy, a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts, and assets. Until now, Chapter 11 was considered a fairly lengthy and expensive process more likely to appeal to large companies, while small businesses were more likely to pursue Chapter 13 bankruptcy. 

Chapter 11 bankruptcy also doesn’t mean a business is about to close. Leading retailers like J.Crew and Neiman Marcus have filed for Chapter 11 bankruptcy protection and continued to keep stores open. David Berliner, bankruptcy and restructuring advisor at BDO, said in an interview with Fortunate magazine that:

“The whole purpose of Chapter 11 is to give a company a chance for a restructuring. If a company has good prospects for continuing in business, the balance sheet is fixed. The goal is wiping out debt to make it manageable.”

Now, with more small businesses able to file for Chapter 11, those companies that can’t pay all their bills even after the government bailout can use it to restructure their debt payment and reduce debt so they can stay open once the lockdowns are lifted. And while Chapter 11 is usually very expensive, the new rules are intended to make it more cost-effective for small businesses to benefit from it.

Can Chapter 7 Bankruptcy Help Small Businesses During COVID-19?

Small business owners can also turn to Chapter 7 to get rid of business debt. Chapter 7 is frequently used by individuals to discharge their debts, particularly credit card debt. However, for a small company, even after declaring Chapter 7, they’re still responsible for their business debt. That’s why many small businesses often turn to Chapter 13 bankruptcy, which allows them to set up a payment plan for 7-10 years to pay off their business debts.

The new Subchapter 5 change makes Chapter 11 appealing to small business owners. Under Chapter 11, your business can negotiate more favorable debt terms with creditors while keeping the assets you need to stay operational. Subdivision 5 makes a Chapter 11 bankruptcy feel more like a Chapter 13 bankruptcy. You now get a bankruptcy trustee who oversees the case and ensures the debtor makes payment plans, and your plan is approved by a judge, and not by a number of votes among your creditors. 

The increased debt ceiling is only available for one year, so if your Louisiana business is struggling right now with debt, it’s best to speak to an experienced bankruptcy attorney who understands the law and can guide you on the best path forward.

Get Guidance on Bankruptcy from Louisiana Bankruptcy Lawyers

If your Louisiana business is closed due to COVID-19, we understand how scary it must be right now. If you’re struggling with debt and contemplating different options for filing personal or business bankruptcy, the attorneys at E. Orum Young Law Offices remain open as an essential business. 

With more than 35 years of experience, they understand the complexities of filing for bankruptcy and can help ensure you’re on the best course to financial freedom. Call 318-450-3192 for a free case review or contact them online today.