(This post originally appeared on The Hill)
This week officials in Philadelphia announced that, starting Friday, all restaurants in the city would no longer be allowed to serve customers indoors through the end of the year and face limitations on serving outdoor groups as well. Similar scenarios are playing out in cities across the country as COVID-19 cases are spiking and governments panic.
For a small restaurant owner anywhere in the country, this would be disheartening news. For those in Philly, it’s devastating. “We shouldn’t be in this place,” Nicole Marquis, who owns three establishments in the city said in a Philadelphia Inquirer report. “It’s utter chaos, and we’re now headed into the worst wave of business closures. We used all of our resources through summer.”
So, is this the final nail in the coffin for these small business owners? It doesn’t have to be. If you’re a restaurant owner – or one of the many other small business owners facing a new round of potentially untenable shutdowns due to COVID – you still have one trick up your sleeve to survive: declare bankruptcy. It’s not as bad as you think. And this year it got a lot easier.
That’s because in 2019 Congress passed a bill called the Small Business Reorganization Act. And because of that new law, which became effective this year, it is much easier and less punitive to file for Chapter 11 reorganization. The intention of the law is to make a reorganization viable for smaller enterprises by reducing the red tape, lowering costs and providing a quicker way for a business to get back to work.
Once a business declares Chapter 11 and is assigned a trustee, it can continue to operate and remain fully in control of its business while settlements are negotiated with vendors (like landlords) over the course of 90 days. No committees. No complex paperwork. No “disclosure” statements. No delays — the 90-day period is required. Because of this the costs of filing and legal fees are significantly less.
The new law puts control solely in the hands of the small business owner. Debt paybacks can be made over three to five years, and even if a deal with certain creditors can’t be reached, the courts will allow full payback over the life of the reorganization plan using a pre-established payback formula while the business owner still retains the business. Personal assets of the business owner – as long as they weren’t previously pledged – would likely not be in jeopardy. Also, if a business owner took out a mortgage on their home to pay for their business, then those debts can be thrown into the bankruptcy proceedings too.
There are some downsides to this law. Eligibility is limited to businesses with debts up to $2,725,625 (excluding insiders). But this amount was temporarily raised to $7,500,000 thanks to the CARES Act. A paid trustee is mandated, and “status” conferences are required. The 90-day filing requirement goes fast and requires quick action. An owner’s overall “disposable income” will be included in the payback calculation.
But this is not defeat. This is a strategy.
Of course, we all know there’s a stigma to declaring bankruptcy. Credit scores and histories are impacted. Relationships with vendors may suffer. The PR in the local media won’t be pretty. But you know what? Who cares! These are unprecedented times, and we’re talking about people’s livelihoods here. And if you’re a small restauranteur facing elimination, what are your options? Wait for another government stimulus? Don’t hold your breath.
Declaring Chapter 11 gives that restaurant owner something that’s desperately needed: time. Sure, the business can stay in operation, make a few deliveries, cut its staff to the bone, serve those intrepid outdoor diners (the average January temperature in Philly ranges between 23 to 42 degrees) and pray to their personal saviors that those promised vaccines will work as promised so that by springtime the virus will be clearly in decline and people can get back to their normal lives. This should all happen. But it won’t happen overnight.
Would I be back to my favorite restaurant after COVID, even if it once declared – and then emerged from – Chapter 11 bankruptcy? Of course I would, and so would everyone else. We get it. We sympathize. We know this was a once-in-a-generation event and that declaring bankruptcy isn’t a stigma. And besides, if the food’s just as good, I’ll just be happy the place is still around.