A new law could make it easier for businesses to file for Chapter 11 bankruptcy and remain open, with more leverage for small businesses and easier ways to force negotiations with suppliers and landlords, The Wall Street Journal (WSJ) reported.
The laws around Chapter 11 have long been too complicated and costly for smaller businesses, rather instead used for big businesses, WSJ reported. But a recently-passed law, the Small Business Reorganization Act, took effect in February and March, helping to do away with harmful older practices that forced businesses into liquidity to pay creditors without giving them a chance to fight to stay active.
The law was designed in large part to help save jobs, and ended up being rather prescient, taking effect right as the debilitating pandemic set in in mid-March, according to restructuring and bankruptcy attorney Ryan Wagner with Greenberg Traurig.
The new law could prove to be a boon for the numerous smaller businesses looking to file for bankruptcy over the coming months due to pandemic-fueled economic difficulties. June was the top month this year for such filings, with 131 overall, and many were filed in the hardest-hit states like Florida, Texas, California, New York and Illinois.
One case, cited by WSJ, is that of Twisted Root Burger, whose co-founder Jason Boso had to file for bankruptcy for the company after it expanded into 24 restaurants in the region over the past 14 years. Boso said he wouldn’t give up — in fact, by filing for bankruptcy, he estimates he’ll end up saving $500,000 on liabilities, and be able to still operate five of the restaurants that had to file for bankruptcy.
The company’s quick expansion had already saddled it with debt. From March, when Twisted Root Burger had to shut down with most of the rest of the country, the debt began piling on more. But using bankruptcy and negotiations with landlords and suppliers, he was able to restructure and cut down on the debt, according to WSJ.
Boso might put another six of his locations into bankruptcy soon, which he calculates could help to save him money and cut down on liabilities, WSJ reports.
Research from the National Bureau of Economic Research (NBER) from May showed that hundreds of thousands of smaller businesses won’t recover from the effects of the coronavirus. Two percent may already be permanently gone, the research found.