Filing for Bankruptcy: Considerations for Small Businesses
Kenneth J. DeGraw
Partner, CPA, CFP®, CFE, Market Leader, Financial Distress and Recovery Services
Jun 16, 2020
Bankruptcy is an intimidating process that involves great consideration and care. With the recent expansion of the Bankruptcy Code, to include Subchapter V to Chapter 11, under the SBRA and expanded under the CARES Act, small business owners find themselves with a new opportunity to emerge from financial hardship instead of facing liquidation. While the first step towards emerging from Bankruptcy is filing, there is much to consider before making that monumental move.
How Do I Prepare for Subchapter V Bankruptcy?
Bankruptcy is invasive. It is a public process, and small business owners often find the loss of control difficult to manage. Bankruptcy is a challenging, dramatic decision, and should be a thoughtful choice after considering all other options. Consulting with a knowledgeable attorney and financial advisor is critical to success.
The first step in preparing for Subchapter V Bankruptcy is to ensure that you meet the qualifications. Business debtors engaged in a business or commercial activity that have noncontingent, liquidated debt under $7.5 million are eligible. Note that this limit is in place until early 2021, when the limit will return to approximately $2.7 million. Single-asset realty cases are not eligible to file under Subchapter V.
Be realistic when considering the idea of bankruptcy. The process can only cure something fixable. If you are operating beyond your means and resources, filing for Bankruptcy will not heal the company wounds; it will eventually lead to a Chapter 7 Bankruptcy filing or complete liquidation.
For questions or further assistance, please contact a member of Withum’s Forensic and Valuation Services Group.
Four Questions to Ask When Considering Chapter 11, Subchapter V Bankruptcy
When you consider filing for Subchapter V Bankruptcy, ask yourself the following:
- What will my business look like when we emerge from bankruptcy?
- Can bankruptcy fix what is wrong, or is there something systemically broken that will remain broken?
- Do I have the right management team in place that can reject preconceived notions, reassess and see a path forward?
- Do I have the trust of my employees and the confidence of my customers and suppliers?
Also, consider the many questions you will face from your team. Your employees want to know if their jobs are safe. Vendors want to know if they still have your business and if they will receive payment. Customers want to know if you’ll be around. Prepare to answer these inquiries confidently.
Before filing for Chapter 11, Subchapter V Bankruptcy, have the framework of a plan already in place, at least amongst your advisors. Executing your plans and financial situation, as well as communication with stakeholders, during the bankruptcy process, is vital to maintaining control and successfully emerging.
Historically, reemergence from bankruptcy via Chapter 11 was reserved for big businesses. Subchapter V Bankruptcy is a unique opportunity for small companies, impacted by the coronavirus or otherwise, to save and give their businesses a future.
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