Bankruptcies have eased, but economic pressures could force more small businesses to seek cover

Surprisingly, despite the pandemic, insolvency claims have declined significantly in the last year: by March 2022, annual insolvency claims totaled 395,373, compared with 473,349 in the previous year, according to statistics released recently by The administrative body. US Court of Justice Service. This is 16.5% decrease.

Government relief programs and the historical growth of household wealth, fueled by a strong stock market and higher real estate prices, are among the reasons for explaining this trend. But unfortunately, many experts believe that this trend will be reversed and bankruptcies will soon increase.

Why? As higher inflation, supply chain problems, slowing global production and rising interest rates contribute to growing concerns that the U.S. economy could enter a recession sometime this year. If this happens, then small businesses, some of which are still rocked by the pandemic, may see a drop in demand and pressure on profits, which may force them to make some difficult decisions whether to declare bankruptcy or not.

Brad Sadek, a Philadelphia-based insolvency attorney, says many small businesses are willing to file for insolvency, not during financial difficulties, but after.

“If businesses fail to get their loans from the Salary Protection Program forgiven, or if there are problems paying off other debt due to a decline, then bankruptcies will increase,” he said. “Many business owners may also be at risk, especially if the real estate market continues to shrink and the value of real estate decreases. The number of bankruptcies will increase. “

It all sounds grim. But there is some good news. This is because in 2019, a bill called the Small Business Reorganization Act was passed to help small businesses take advantage of the insolvency rules of Chapter 11 without incurring the high costs and provisions required by the existing law. .

Legislation – called Chapter 5 of the Known – streamlines the reorganization process for small businesses. For example, it allows a business owner with financial difficulties to propose a reorganization plan for an appointed manager without having to obtain approval or seek votes from his unsecured creditors, as is the case under Chapter 11. The law also pushes up the deadline. to apply for a 90-day reorganization plan that helps business owners get going faster.

There are other benefits.

Instead of requiring the business owner to raise more capital to keep his share – a condition often imposed by creditors – the law only requires the reorganization plan to be “fair and equitable” and ensures that the business owner’s planned payments or value of the property that will be distributed under the plan is not less than the estimated disposable income of the owner. In many cases, the business owner’s personal residence can also be protected. An extended period for paying administrative costs is also allowed, and the business owner could potentially be released from bankruptcy faster than under Chapter 11.

While the Small Business Reorganization Act established these streamlined insolvency procedures to help small business owners maintain their businesses and retain jobs, it was limited to businesses with debts of up to $ 2.7 million. The 2020 CARES Act temporarily allowed more small businesses to qualify for these benefits by increasing the debt ceiling for small businesses from $ 2.7 million to $ 7.5 million. Unfortunately, this increase expired on March 27, 2022.

The new bipartisan legislation, called the Bankruptcy Threshold Adjustment and Technical Corrections Act, aims to address this issue. The bill, which was passed by both the House of Representatives and the Senate earlier this month and awaits President Biden’s signature, will provide a two-year extension of the CARES Act increase to $ 7.5 million and make minor technical amendments to the bill. for the reorganization of small business. It also increases the debt limit for individuals to qualify for personal bankruptcy under Chapter 13 for two years, allowing more people to try to save their homes from foreclosure.

Senator Chuck Grassley (Iowa) was one of the main sponsors of the new bill and believes it could help up to 40 percent more businesses facing bankruptcy survive because of its streamlined rules.

“Maybe a local restaurant won’t be passed down from one generation to the next,” he told me recently. “But there are many small manufacturing companies that do, so this legislation will also help businesses continue for the next generation of families.”

Hopefully, your small business should never consider bankruptcy. But if you find yourself in this situation and eligible, then extending the rules of Subchapter 5 may be key to your survival. If you think this is possible, it is important to talk to an insolvency expert as soon as possible.

“The new legislation is a very good thing for companies facing financial problems,” Sadek said. “And I think it will be used by more small businesses here over time.”

Gene Marks is a Chartered Certified Accountant and owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.

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