When Does a Small Business File for Bankruptcy? Questions and Answers - The New York Times

When Does a Small Business File for Bankruptcy? Questions and Answers - The New York Times


When Does a Small Business File for Bankruptcy? Questions and Answers - The New York Times

Posted: 01 May 2020 03:18 AM PDT

All the forecasts point in the same direction: A wave of small-business bankruptcies is coming.

More than 40 percent of the nation's 30 million small businesses could close permanently in the next six months because of the coronavirus pandemic, according to a poll by the U.S. Chamber of Commerce.

"It's a crisis that will impact our economy for generations," said Amanda Ballantyne, executive director of Main Street Alliance, an advocacy group for small business. "We're going to lose so much of the small-business sector."

Commercial bankruptcies in the first quarter of 2020 ticked up 4 percent from a year earlier, according to data from the American Bankruptcy Institute. But many of those filings were made before the pandemic, when the economy was healthy. Right now, some owners are waiting to find out if they will receive federal stimulus aid before deciding whether to file for bankruptcy protection.

Many of them may just disappear. But for others, a bankruptcy law that took effect in February, the Small Business Restructuring Act, could help them survive the pandemic.

Before that law, if a struggling small business wanted to restructure its debt, its only option was Chapter 11, which is the commercial bankruptcy code. It allows a company to negotiate with creditors for better terms — a process known as debt restructuring — and in some cases dismiss debt. The goal is for the company to get a fresh start.

But the Chapter 11 process is long and expensive, and a recent report by the Brookings Institution found that it is better suited to large firms. The new rules, known as Subchapter 5 because they are part of Chapter 11, give firms with less than $2.73 million in debt the power of reorganization with a few key simplifications. Two main changes: A judge can enforce a restructuring plan even if creditors don't like it, and the owner can continue running the business.

Congress recognized that this tool could be a lifeline to small businesses trying to get through an economic shutdown. So as part of the federal stimulus program, it expanded eligibility to firms with up to $7.5 million in debt. That change means Subchapter 5 could help up to 70 percent of all businesses that might file for bankruptcy, Brookings estimated.

"A number of small businesses who are prone to just giving up could be saved," said Bob Keach, who leads the bankruptcy practice at Bernstein, Shur, Sawyer & Nelson, a law firm in Maine.

A to Z Total Heating and Cooling in suburban Detroit was one of the first companies in the country to file for bankruptcy protection under the new rules. The family-owned firm has been operating for nearly four decades, but business really took off in the past few years. The company struggled to manage the growth.

Its primary problem? Labor. The company's two dozen employees weren't enough to keep up with demand, and Jerry Stetina, A to Z's chief operating officer, said it couldn't find additional workers. That meant the firm got bogged down paying overtime on top of the typical $35 hourly wage — and tapped out cash reserves.

"I know it sounds really crazy, but the process of growing put us in the situation we're in," he said.

Then a mild winter hit Michigan this year, and fewer customers called for new furnaces or repairs. What little work the employees did have was shut down by the coronavirus. But they didn't want to give up: Mr. Stetina could see a strong summer season; A to Z just needed a bridge to get there.

"People will live without heat, but they won't live without air-conditioning," he said. "Our phones are ringing now with questions about A.C. start-ups to get ready for summer." When A to Z exits bankruptcy, the company plans to hire a controller to better handle its finances.

Here are some of the main questions to consider if you are thinking about a bankruptcy filing for your small business.

Business owners must search their hearts and assess their balance sheets.

"The first question to ask is: 'Do the owners want to keep this going?'" said Kimberly Ross Clayson, whose firm, Clayson, Schneider & Miller in Detroit, advises small-business clients.

If your heart isn't in it, call a lawyer to help you wind down operations. But if you still think your business can become viable, a Chapter 11 bankruptcy might be the right call.

Initially, Mr. Stetina of A to Z was scared to call a lawyer. He knew the stigma around bankruptcy and was worried what clients might think even though A to Z planned to restructure, not discharge, debt. Once he did call, he said, he wished he had done it earlier.

"A lot of big businesses have been doing it for years, and it's some of the reason that they are in business still," Mr. Stetina said.

Write a business plan for a post-pandemic business world. How will your business operate? Where will revenue come from? What new expenses — for marketing, infrastructure and more — will you incur to help your business pivot? If you can write a business plan that shows a positive balance sheet after bankruptcy, restructuring might work.

"Chapter 11 bankruptcy is designed to fix people's balance sheets," Mr. Keach, the Maine lawyer, said. "It allows you to restructure some debt, eliminate other debt. It doesn't generate revenue for you."

Every business owner's situation is different. But a general rule is: If you can't identify enough future revenue to pay off the debt, borrowing may make matters worse. Some business owners no longer have any personal resources to draw on and may not receive federal stimulus funding.

"Don't borrow blindly and say, 'It will all work out,'" said Ms. Clayson, who is a federal trustee for Subchapter 5 claims. "If you are thinking a credit card is how you will open your doors and bridge yourself to the next stage, then you really need to be thinking about how viable your business is."

If you find yourself considering nonbank lenders with high interest rates, it's time to call a lawyer, she said.

No. If you can pay off your creditors or negotiate a deal with them, you don't need to file for bankruptcy protection. But you will want a lawyer to draft agreements.

Also: Don't forget about withholding taxes. When times are tight, many small-business owners who manage their own payroll dip into that pot of money they set aside at each pay period and use it for other expenses.

"If you have unpaid withholding taxes, the business owner becomes personally liable," Ms. Clayson said.

Think of Chapter 7 as a funeral and Chapter 11 as a do-over.

Chapter 7 is used for both individual and business bankruptcies when the goal is to wipe out debt. The debt can go away, but you may also lose your assets.

If you wanted to restructure your business debt, you would consider a Chapter 11 bankruptcy and, more specifically, Subchapter 5 for small businesses. But you can always try to negotiate with creditors outside of a formal bankruptcy.

"The only reason you need to use Chapter 11 at all is to deal with recalcitrant creditors," Mr. Keach said. "If creditors won't negotiate with you, bankruptcy allows you to cram down a plan of restructuring."

There are other forms of bankruptcy filing: One, Chapter 13, is used for personal reorganizations, when you want to try to keep your assets and renegotiate the terms of your debt. Another, Chapter 12, oversees businesses in farming and fishing.

It depends on what personal guarantees you made. Most small-business owners put up their home or some other asset as collateral for start-up loans. In fact, the Small Business Administration requires that as part of its non-Covid-related lending.

If you used your house as collateral, it's possible you would be forced to sell it as part of a Chapter 7 settlement. Under Chapter 11, you may have more luck.

Possibly, but not necessarily. It depends on whether you are closing the business or trying to restructure, and what liabilities you have.

If you are trying to restructure, the goal is for your lawyer to negotiate with your creditors and create a plan that lets you avoid a personal bankruptcy. But if the creditors don't like the deal, they could come after you for any debts you personally guaranteed. In that case, you might be forced to file for personal bankruptcy.

Here is the main thing to know: Like all bankruptcies, it has a magic power called the "automatic stay." Filing for bankruptcy stops creditors from collecting from you.

"It buys you time," Mr. Keach said.

And time is everything. For example, take a restaurant that was having its best year before the pandemic, but then its revenue disappeared. A Subchapter 5 bankruptcy could help the company by halting creditor collections and allowing owners to renegotiate terms.

"What it might allow is, with a couple of exceptions, a built-in moratorium on rent," Mr. Keach said. "You could propose a plan where you could literally not pay anything toward old debt for four to six months as long as your projections show that you have positive projected income after that."

In exchange, business owners will need to use their net operating income — what's left after the usual expenses like rent, payroll, cost of goods — to pay creditors for the next three to five years.

Yes. Securing funding may be more challenging, but it's not impossible.

"My favorite clients have always been those who are already on to their next idea," Ms. Clayson said. "This is the American way. You can start over. This isn't a black mark."

GSA FAS update: E-commerce marketplace back on, Alliant 2 small business details coming - Federal News Network

Posted: 01 May 2020 08:43 AM PDT

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The General Services Administration is used to straddling the line of responding to a crisis and plowing ahead with dozens of initiatives.

The current pandemic emergency, however, is forcing the Federal Acquisition Service to move at an accelerated pace. Whether it's buying medical supplies or laptops, contracting officers are under a different kind of pressure today.

Julie Dunne, the commissioner of the Federal Acquisition Service at GSA, said contracting officers are changing their approaches to keep up with agency needs, all the while the policy team is ensuring the other long-term initiatives are not suffering.

Julie Dunne is the commissioner of the Federal Acquisition Service at GSA.

The e-commerce marketplace platform is the most recent example of FAS's need to balance priorities.

GSA decided to pause the initiative during the first few weeks of the coronavirus emergency. But Dunne said FAS lifted the pause and the plan for award, while delayed a bit, is still moving forward.

"You always are reacting to the environment, but frankly things generally have kept on track," Dunne said in an exclusive interview. "We are trying to maintain our momentum by multi-tasking."

Dunne, who became the permanent commissioner of FAS in January, said for other initiatives such as the Enterprise Infrastructure Solutions (EIS) program it's too early to tell if or how the pandemic will impact the awarding of contracts.

Alliant 2 small business update

Another priority that many vendors are waiting to hear about is the Alliant 2 small business contract.

GSA made awards in December 2017 and faced a series of protests. GSA decided in August to take corrective action and take revised proposals for the $15 billion IT services contract.

"It's in the midst of litigation so I can't say too much. I understand the need for and the value of making sure we get information out quickly. I'm hopeful in the next couple of weeks there will be some developments that we can share," Dunne said. "GSA's leadership is fully committed to small business and making sure they are a part of our industrial base."

Dunne said whether it's EIS or the schedules consolidation effort, FAS is paying close attention to the progress each of these initiatives are making.

Read more: Acquisition News

"We are in constant contact with the agencies and hearing from the vendors in terms of what they are hearing and seeing and what their capacity is. We will continue to monitor that," she said. "It's been almost two months now since we have been dealing with this. We are monitoring things very carefully and trying to balance the workload."

The balance Dunne speaks of isn't easy these days.

Quick turnarounds for SBA, Navy

GSA tends to be among the first places agencies go to when they need a product or service quickly.

For example, the Small Business Administration needed 3,000 laptops to ensure its employees could telework and meet the requirements of the stimulus law. GSA provided them despite what SBA chief information officer Maria Roat said was a tight supply chain.

"We worked with GSA who had the equipment available. We could get laptops, but peripheral equipment such as screens, keyboards and mice lagged behind it," Roat said during an April 30 webinar sponsored by ACT-IAC. "We saw the strain on the supply chain in general from [a] hardware perspective. We talked to many vendors who were working through what we needed and they were saying we just don't have equipment available."

The Navy called on GSA in early April when its hospital ships, the USNS Comfort and the USNS Mercy, needed supplies. Dunne said FAS delivered the products in record time.

"That was due to the hard work of some of our contracting professionals. I think time to award we are stepping up because we understand the urgency and we are trying to support other agencies like DoD and the like who are on the front lines of things," she said.

FAS is working with GSA's senior procurement executive Jeff Koses on policy changes such as prompt payment for small businesses or the onboarding and off boarding of contractors.

"There has been training for 1102s [contracting officers] and heads of contracting activities. There has been open communications. I hold daily meetings with all of my leadership as does [GSA Administrator] Emily [Murphy]. That helps us understand where the needs are in terms of what flexibilities do we need here and how can we better serve our customers," Dunne said. "The crisis increased the opportunity for FAS and the Public Building Service to work together. We used our acquisition expertise to help them with their supplies [to clean federal buildings]."

Assisted SBIR program now permanent

In addition to some of the policy changes and the ongoing initiatives, FAS also is expanding its small business innovation research (SBIR) program, part three.

GSA launched an effort in August 2018 to help connect companies with federal buyers.

Read more: Technology News

Dunne said that assisted acquisition services pilot is now permanent and made a recent award to help with a specific Defense Department challenge.

"They were able to make an award in the DoD space to help with supply chain risk management, which will lead to making sure medical equipment and other types of providers are vetted appropriately. We got some kudos from DoD for making that award in an expedited manner," she said. "The global supply service has been at the front of the line in terms of pushing forward with COVID-19 response. They automated acceptance of vendor back orders and that saved more time on the back end."

Dunne said by adding automation to checking on vendors' products, it relieved some the burden on contracting officers so they didn't have to perform this manual process.

Over the long term, Dunne said it's unclear if the coronavirus pandemic will impact FAS' revenues, which funds 80-90% of all their activities.

She said certain markets like travel will take a hit, but others like cleaning products or enhanced screening services where the demand was small, but now has increased exponentially.

"The acquisition workforce has been incredible and it's been an enterprisewide effort to deliver," she said. "GSA has made it apparent that we are here to help our customer agencies and we've tried to anticipate needs by putting requests for information out there and the like. Vendors are coming to us with innovative products and services and that's really helpful."

For small business loan program, forgiveness may be the hardest part - Reuters

Posted: 01 May 2020 04:38 AM PDT

WASHINGTON (Reuters) - The U.S. government's $660 billion small business rescue program has stumbled on missing paperwork, technology failure, and the misdirection of funds to big corporations. Now, it is lurching toward another hurdle: forgiving those hastily arranged loans.

Access for costumers is closed at a shopping center due to the business downturn caused by the spread of the coronavirus disease (COVID-19), in the tourist district of Waikiki, in Honolulu, Hawaii, U.S., April 28, 2020. Picture taken April 28, 2020. REUTERS/Marco Garcia

The second round of the Small Business Administration's Paycheck Protection Program launched on Monday, allowing lenders to issue forgivable, government-guaranteed loans to small businesses shuttered by the novel coronavirus outbreak.

Smoothing the forgiveness process is critical for the program to succeed, but a lack of government guidance on the related calculations and necessary documentation could land borrowers and banks alike with billions in unexpected debts.

"Probably every PPP borrower expects their loan to be forgiven, but it is not that simple," said Paul Merski, an executive at the Independent Community Bankers of America.

"There are rules and regulation to consider. So the borrower best have their information and paperwork in order."

In principle, the forgiveness terms are straightforward: borrowers must spend 75% of the loan on payroll costs, such as salaries, tips, leave, severance pay and health insurance, within the first two months. The remaining 25% can be spent on other running costs, such as rent and utilities. Money spent on non-qualifying expenses must be repaid at an annual rate of 1% within two years.

But in reality, it is going to be very tricky calculating partial forgiveness sums for borrowers who have not met the 75% threshold, said bankers. They point to potential areas of confusion such as when employees must be rehired and what happens if borrowers do not use the funds as promised.

"I do think it could become a little bit complex, because with every answer there's another question," said Chris Giamo, head of the commercial bank at TD Bank in New York.

That has created uncertainty for borrowers like Josh Mason, founder of Maryland catering company Vittles Catering. He said his bank only gave him instructions on how to maximize his eligibility for forgiveness on April 24, two days after he received the funds. Those instructions warned clients that the forgiveness process was "not yet clear."

While a 1% interest rate is very low, the two-year repayment term could see companies that fail to qualify for full forgiveness landed with chunky monthly payments.

"I have read all the guidelines, but I wouldn't be able to say exactly how much will be forgiven and not forgiven. I think that ambiguity is going to create a little bit of a mess when all of this comes to a close," said Mason.

Given the many potential calculation variables, banking groups are pushing the SBA and the Treasury Department to issue a standard forgiveness form for borrowers and to create a calculator so every bank gets the same outcome when using the same data, said executives at three bank groups.

They are also seeking clarity on which documents are necessary to prove borrowers' expenditures, and how closely banks are expected to scrutinize that paperwork.

Spokespeople for the Treasury and SBA did not respond to requests for comment, but the agencies are aware of the issues said David Pommerehn, general counsel of the Consumer Bankers Association.

"From a banking perspective, we are really acting as a middleman here. We don't want to carry these loans on our books," he said. "We see this as potentially a bigger mess than the funding process."

Reporting by Michelle Price and Pete Schroeder; Editing by Daniel Wallis

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