Bankruptcy and Debt Forgiveness for businesses adversely impacted by the COVID-19 pandemic
T
By Robert A. Mathers, JD, CPA, ABV, PFS and
he COVID-19 pandemic is unlike anything this country has experienced in more than 100 years. Although the United States has been addressing the pandemic since early 2020, there remains substantial business uncertainty. It is difficult to predict how a state may respond to an increase in COVID-19 cases or fatalities. States have imposed varied restrictions, in some cases reflecting local political priorities. In addition, the COVID-19 pandemic accelerated certain existing trends. Big-box retail continues to deteriorate, and working remotely has become increasingly accepted for service industry professionals.
The federal government responded to the COVID-19 pandemic with unparalleled financial assistance, including making available to small William D. businesses hundreds of billions of Gardner, JD dollars of potentially forgivable loans pursuant to the Paycheck Protection Program. Notwithstanding unprecedented federal financial assistance, as of June 30, there was a total of 3,604 chapter 11 commercial business bankruptcy filings — the highest number of such filings for the Jan. 1 – June 30 period since the same period in 2012, when there were 4,122 chapter 11 filings.1 The unemployment rate peaked in April at 14.7%, the highest unemployment rate since World War II. By the end of June, the unemployment rate fell to 11.1%, but there were still nearly 15 million fewer jobs in June than there were in February.
There are many lower middle-market companies with a viable business, but — as a consequence of the COVID-19 pandemic — they require restructuring. For many of these lower middle-market companies, there is a new restructuring tool. In February, the Small Business Reorganization Act (SBRA) became effective. SBRA makes the chapter 11 process for small business debtors shorter, less expensive and more likely to result in a confirmed plan of reorganization.
Small business debtors Only a small business debtor may elect application of SBRA to its Chapter 11 bankruptcy case. A small business debtor may be an entity or an individual provided it meets the following qualifications: a. It engages in commercial or other business (excluding single-asset real estate debtors). b. It holds noncontingent liquidated debts of not more than $7.5 million (reduced to approximately $2.8 million after March 27, 2021). c. At least 50% of the non-contingent liquidated debt is derived from commercial or other business activities. 1
20
On Balance
September | October 2020
Statistics from Epiq and posted on the website of the American Bankruptcy Institute.
wicpa.org
