Listen to Kitty's discussion with Sougata Mukherjee – Editor-in-Chief, Triangle Business Journal about the perils of filing for Chapter 11 Bankruptcy due to the pandemic and an alternative idea.
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PPP forgiveness aside, we need a new bankruptcy category
By Sougata Mukherjee – Editor-in-Chief, Triangle Business Journal
Almost everyone who keeps up with business news knows by now that retailers, travel and tourism companies, hoteliers and many consumer-facing businesses are struggling to add revenue to their books.
While almost 5.2 million businesses have received some $530 billion from the Paycheck Protection Program,a U.S. government loan instrument convertible to a grant, most of that money is gone in the form of paid wages and utility bills.
Initially, small businesses thought the effects of Covid-19 may last maybe three or four months. Now, almost every small business believes business conditions are unlikely to improve until there's consumer confidence, which is unlikely to come anytime soon until perhaps a vaccine is in wide distribution.
So in the meantime, while some businesses are showing some increased activity, most of them are beginning to call lawyers to see how they can save what they have left. And right now, as Congress struggles to come up with another stimulus planfor small businesses, thousands of entities are filing for bankruptcy.
Because of the available options, most businesses are filing for Chapter 11 bankruptcy that allows companies to reorganize but continue operations.
The American Bankruptcy Institute reports there was a 52 percent increase in Chapter 11 bankruptcies in July when compared to same time last year. In June, the number was up 46 percent from the previous year. In fact, since April, every month the percentage increase has jumped.
These are troubled, difficult and yet different times.
One would imagine, while there would have been bankruptcies pre-Covid, the increase in filings are directly the result of the pandemic.
And that's why Congress should enact a new bankruptcy category for businesses – call it Chapter 2020. Everyone can relate to this disastrous year.
Under the new bankruptcy category, just like how companies calculated their PPP loan caps, they will be required to file paperwork with the court that details the loss of revenue and general business. Courts, in return, will allow these companies to shelter from servicing the debt and secured loan payments but continue to pay essential bills such as utilities
Chapter 2020 will be expunged from the business record when the company starts paying 100 percent of its debt instruments and rehires its workers at pre-pandemic levels.
Interestingly, there was a new addition called "Subchapter V" to the Chapter 11 statute earlier this year that was designed to help small businesses move through the bankruptcy process more quickly and with lower costs. But the subchapter clause was not because of Covid-19.
While that has helped some small businesses, it simply is not enough.
As Congress goes back and forth between the House and the Senate chambers to finalize the next stimulus package, it can simultaneously address the bankruptcy issue.
The purpose of the Covid-19 clause in the nation's bankruptcy laws is simple: beyond just stimulus dollars from the government, businesses need help from the court system that helps them protect their assets and offer them a chance to survive and get ahead on the other side. After all, most small businesses are in this predicament not because of bad business decisions but because of the cards dealt to them by health and government officials.
Otherwise, we will lose tens of thousands of businesses employing millions of workers by year's end, and the country's largest companies will get larger. Have any doubt? Just look at the stock market. Who do you think is benefiting from small-business woes?
PPP was a bold, fast and strategic move to protect businesses with a huge assist from lending institutions – temporarily. But as these bankruptcy numbers point out, and as we had suspected some three months ago, we have a structural problem with the U.S. economy.
A helping hand from the courts could be a tool to offer some procedural stability.