As a Bankruptcy Lawyer here in Kansas City I am often being asked by potential clients “should my business be considering Chapter 11 Bankruptcy during these very difficult times?” As one who has practiced in this area of the law since the 1980’s there are several basic guidelines any business owner should use to decide whether a consultation with a bankruptcy attorney is needed, even in good economic times. Given the Pandemic and disruption to the business cycle, however, this is now a good time for many businesses to evaluate whether these factors apply to its situation today. Below are among the most important indicators of whether Chapter 11 can be of help.
- Is the collateral pledged by your business toward its Bank Loan now worth less than the amount owed? This is a factor in most every business Chapter 11, however, it is especially relevant now. For example, if you own a commercial building and borrowed $10 million to purchase it, and pledged a mortgage to secure that loan, the payment on that loan may be able to be substantially reduced in Chapter 11 due to the loss in value of the collateral. A $10 million loan being repaid in 10 years could easily require a monthly payment of over $100,000. If the collateral is now worth $5 million, that payment could be lessened in bankruptcy to as little as $25,000. This is often referred to as a “Cramdown” and can save a business huge amounts on its monthly loan payment. This is often seen today with hotels, restaurants and commercial real estate. If this is the situation with your business, it may make sense to consider Chapter 11.
- Is your Landlord demanding rent payments you cannot make? During this time, Landlords are acting in different ways. Some are more understanding than others. If you are unable to make demanded payments, or have been threatened with eviction and are being pressured for more than your business can pay during this time, it may make sense to consider Chapter 11;
- Is your current income stream able to pay your current needs to operate but not past due debts? While many businesses have suffered a loss of income, if there is enough income to at least pay current obligations going forward (not including past due obligations), it may make sense to consider Chapter 11 to stop collections calls and demands from creditors for past due debts; and,
- A new small business form of Chapter 11 called a Subchapter V (Five) Chapter 11 was enacted into law early last year. It is for businesses and individuals in business who have $7.5 million of debts or less. If your business falls into this category and either paragraph 1, 2 or 3 above apply, it may make sense to consider a Subchapter V Chapter 11. The rules of the new Subchapter V are more debtor friendly and provide for a faster process than a standard Chapter 11.
Many business owners know that once the pandemic is over, they are likely to return to business as usual, however, pressing past due loans, leases and debts will have to be addressed. There are advantages to addressing the situation early, instead of when the stampede takes place.