When Does a Small Business File for Bankruptcy? - Jack G Lezman, PLLC

When Does a Small Business File for Bankruptcy?

Charlotte bankruptcy attorney

All across the country, small business owners are feeling the pinch of the economic shutdown caused by the coronavirus. About 40% of our nation’s 30 million small businesses are facing financial distress at this time. Several of those businesses will close. Others will be forced into bankruptcy. In this article, we’ll discuss small business bankruptcy filings and when you should start considering bankruptcy for your business.

Two Types of Bankruptcy for Businesses

There are two types of bankruptcy that small businesses usually file under. Those are Chapter 7 and Chapter 11. Of those two, only Chapter 11 potentially allows a business to remain in business while they settle their outstanding debts.


Businesses that file under Chapter 7 will be dissolved entirely, their assets liquidated, to reimburse their creditors. The business doesn’t survive the process, but neither does its debts. 


Chapter 11, on the other hand, places the business’s assets into a trust. Some of those assets may be sold off to reimburse creditors while the business uses the profits from current sales to make payments on their consolidated debt. Some of the business’s debts may be discharged. Chapter 11 bankruptcies can last for years. Sometimes, the bankruptcy is converted into a Chapter 7. Other times, the business manages to pull itself out of debt.


Given the complexity and length of Chapter 11 bankruptcy, it can be extremely costly for businesses that are already saddled with expanding debt to afford the process of bankruptcy. Traditionally, this has made it quite difficult for smaller companies to file under Chapter 11 and keep their businesses afloat.

The Small Business Restructuring Act

The Small Business Restructuring Act (SBRA) was one of the many bills passed by Congress to support the economy during the coronavirus shutdown. Small businesses were offered forgivable loans and more to ensure that they keep operating once the economy is reopened. It also extended bankruptcy protections to small businesses and individuals.


The SBRA extends bankruptcy protections to small businesses that earn less than $7.5 million in revenue per year. This is up from $2.73 million. This change could offer a lifeline to more than 70% of the small businesses that have been impacted by the coronavirus.


These businesses can restructure their debts in Chapter 11 while continuing to run their business. Judges also now have the ultimate authority to force creditors into accepting the terms of the bankruptcy even when the creditors are opposed to the deal.


Loans versus Bankruptcy

Many small business owners are waiting to see how their government loans and rebates play out even as they’re bringing in much lower revenue. Others have already realized that their situation is not sustainable. 


As an example, restaurants that offer buffets may not have a place in the post-coronavirus world. We know that we will likely be facing some form of social distancing at least into 2021 and the economic upheaval caused by the pandemic may not start to ebb out until 2022. 


Small business owners are advised to develop a business plan that takes these factors into account. Already, there are too many small business owners who are treating the pandemic as an inconvenience that will one day simply vanish. That likely will not happen. Until there is a vaccine for the virus, periodic shutdowns amid spikes in cases could be the norm.


Those who are deciding on a loan over a Chapter 11 restructuring will need to ensure that their business is viable until a vaccine has been developed. Unlike most businesses that go under, at least the folks that closed amid the quarantine have an excellent excuse.

Talk to a Small Business Bankruptcy Attorney

Before you make a move, having the advice of a small business bankruptcy attorney could make all the difference. Call the Law Office of Jack G. Lezman, PLLC today. You’re under no obligation to file and initial consultations are generally free. We can go over your finances, debts, and income and help you decide if Chapter 11 is right for you.

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