Options for Businesses in Financial Distress

Jim LaMontagne | March 8, 2021

When the COVID-19 pandemic grabbed hold of the economy in late spring of 2020, many predicted a wave of commercial bankruptcy filings. Despite the pandemic (and the predictions), New Hampshire commercial bankruptcy filings are at their lowest levels in over 10 years.  Of course, the news is not all good.  As reported by several New Hampshire media outlets, hundreds of New Hampshire businesses permanently closed in 2020 and those businesses that managed to keep the lights on are still struggling, even as the latest round of PPP money is being distributed.  While there is optimism, given the COVID-19 vaccine, that those businesses that have remained open will survive the pandemic, the reality is that those businesses are not yet out of the financial woods.  Landlords, lenders and vendors who have loosened payment terms over the last 12 months will soon be asking for those missed or delayed payments and may even become quite aggressive in their collection efforts, given their own financial burdens.  Businesses will need efficient options to address aggressive actions of its creditors and those debts that have been accruing over the last year.  Two options for businesses to consider are forbearance agreements or the Subchapter V process in bankruptcy, the new streamlined, less expensive, and more efficient bankruptcy process for small businesses.

Forbearance agreements

It is critical for financially distressed businesses to communicate with their lenders, landlords, and vendors to allow for a restructuring outside of court.  One form of restructuring is a forbearance agreement. Forbearance agreements (FA) are agreements between a debtor (the business) and creditor (lender, vendor or landlord) that result after a debtor has defaulted on its payment terms with its creditor and the debtor has asked the creditor to forbear from exercising its collection or foreclosure rights.  Under a FA, the creditor agrees not to take collection action or to foreclose for a period of time in exchange for modified payments from the debtor, or, other concessions if payments are suspended.  For a debtor, it is critical that a FA include, among things, a) specific provisions regarding the defaults, b) attainable benchmarks including feasible payments; and, c) a clear time-frame of forbearance.  While a FA is not a long-term solution, it can be designed to provide a debtor with many months of relief as it stabilizes itself.

Bankruptcy

Chapter 11 of the Bankruptcy Code has historically been the manner through which struggling businesses have attempted to reorganize while retaining control of their assets and operations. Chapter 11 provides invaluable tools for a business to restructure debt and do away with burdensome contracts, among other things, but chapter 11 also often involves slow and expensive processes that prohibit smaller businesses from utilizing chapter 11. In February 2020, this problem was addressed with the enactment of the Small Business Reorganization Act (SBRA). SBRA amended the Bankruptcy Code to add Subchapter V, a new streamlined chapter 11 process for small businesses.  Subchapter V aims to make bankruptcy proceedings more expeditious and less costly by, among other things, eliminating certain procedural hurdles, expediting timeframes within which a business-debtor must file its plan of reorganization and by eliminating certain fees.  For a debtor to be eligible to file a Subchapter V case, a debtor must be engaged in business and have total secured and unsecured debt not exceeding $2,725,625. However, the CARES Act amended SBRA and Subchapter V by temporarily increasing, until March 26, 2021, the debt limits from $2,725,625 to $7,500,000, thereby expanding the eligibility for these new streamlined chapter 11 cases to many more small businesses.

Why should a Subchapter V bankruptcy case be an attractive option for financially distressed smaller businesses? Subchapter V affords a debtor all of the advantages of a traditional chapter 11 case (the ability to restructure and cramdown debt, the ability to reject unfavorable leases and contracts, and, at the end of the process, a financially healthier debtor) but through a quicker and less expensive process.  In a Subchapter V case, a) The debtor must submit its plan of reorganization within 90 days of filing bankruptcy, thus ensuring a speedy process; b) A trustee is appointed in each case and his/her primary task is to facilitate a consensual plan of reorganization, thereby providing the debtor with an independent third party to assist in expediting the process. c) Fees owed to the federal government are eliminated.

As a result of the SBRA and Subchapter V, chapter 11 should become a less expensive and more manageable process for small businesses, providing a restructuring opportunity that otherwise may have been too costly and too unpredictable.

While small businesses are encouraged to communicate with lenders, landlords, and vendors to allow for a restructuring outside of court, small businesses should consider taking advantage of this new streamlined chapter 11 process if a bankruptcy filing is needed.


This article was originally published to the Portsmouth Herold and can be found here.