Bankruptcy Filings: Why They’re Dropping

Transcript

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Gene (00:02):

Hey everybody and welcome to The Hartford’s Small Biz Ahead podcast. I’m your host Gene Marks and thank you so much for joining me today. I wanna talk to you about a little bit of news this week, as you know, that’s really what I’m doing with this weekly podcast. I’m taking like something from the news and sort of giving you my point of view on it – just how it impacts your business big or small, but most likely small. So let’s get to it. Okay. There is a big piece of news that I think would be a big interest to you, that has to do with bankruptcy. It may come as a surprise to you that despite the pandemic, bankruptcy filings have actually fallen over the past year, significantly fallen. According to statistics that were recently released by the administrative office of the U.S. courts…

Gene (00:47):

As of this past March annual bankruptcy filings actually fell 16 and a half percent compared to the prior year. Government relief programs and a historic rise in household wealth added with a strong stock market, throughout last year, higher real estate prices. These are among the reasons that are probably the reason why a lot of small businesses, even with the pandemic did not file for bankruptcy but unfortunately, many experts that I’m talking to believe that this trend will actually reverse and bankruptcies are soon gonna be back on the rise. Why? Well, I guess it shouldn’t be much of a surprise. We’ve got higher inflation, we’ve got supply chain woes. We’ve got a slowdown in global output. We’ve got rising interest rates. All of these things is creating a growing concern that the economy is heading into a slowdown, perhaps a recession before the end of the year.

Gene (01:44):

And if that happens, then small businesses all around the country may see a drop off in demand and a pressure on profits. And for some still recovering from the pandemic, it may force them into making some hard decisions about whether or not to declare a bankruptcy. One attorney I spoke to said that many small businesses tend to file for bankruptcy, not during financial distress but in the aftermath of the financial distress. If your business has trouble getting your Paycheck Protection Program loans forgiven, or if you’re having trouble paying back other debt because of a downturn, you’re gonna be potentially being forced to consider some type of a bankruptcy reorganization. If you can’t handle that stuff. A lot of business owners may have their assets at risk, too. Particularly if the real estate market continues its downturn and property values decrease, bankruptcy numbers are going to go up.

Gene (02:38):

And a lot of attorneys that are in that field are predicting that, that is going to happen. So like, listen, all of this sounds grim, but there is some good news. That’s because in 2019 there was a bill called the Small Business Reorganization Act. It got past them and it was designed to help small businesses take advantage of the chapter 11 bankruptcy rules without incurring the high costs and regulations required by the existing law. This legislation, which by the way, is referred to as sub-chapter five, it streamlines the reorganization process for your small business. For example, it allows a financially troubled business owner to propose a plan of reorganization to an appointed trustee without having to obtain approval or solicit votes from its unsecured creditors, which is the case under chapter 11. Not only that, but the legislation moves up the filing deadline for reorganization plans in 90 days, which helps business owners get back on their feet a lot quicker.

Gene (03:38):

There are even other benefits, under this new legislation, this relatively new legislation, rather than requiring more capital to retain your ownership. The legislation only asks that the plan, your reorganization plan is fair and equitable and ensures that your projected payments or the value of your property to be distributed under the plan is not less than your owners, your projected disposable income. In many cases, your personal residents may also be protected under this new law. And an extended period is also allowed to pay for administrative expenses. And a business owner could potentially be discharged from bankruptcy faster than chapter 11. These are all really great things, right? I mean, it’s making it easier for us to file for bankruptcy so we can reorganize and maybe get back to business. Now, while all of this was being done, it really only applied to businesses that had debts of up to 2.7 million dollars.

Gene (04:34):

So if you had total debts above that, you wouldn’t be eligible for these streamlined processes. However, thanks to The Cares Act of 2020, that debt limit was bumped up to seven and a half million dollars. So that significantly widened the number of businesses that would be eligible to take advantage of these new, easier reorganization rules. But unfortunately that increase in the debt limit expired back in March. But fortunately, there’s new legislation. In fact, new bipartisan legislation, it’s called the Bankruptcy Threshold Adjustment and Technical Question Act. It’s now fixing this problem. This bill, it passed the house. It passed the Senate earlier this month. It’s awaiting president Biden’s signature, which is most assured it’s gonna extend this debt limit for this, for these easier bankruptcy rules to seven and a half million dollars, as well as making other technical fixes, which means that if you’re in trouble and if you’re hitting any type of a bankruptcy situation, you might be able to use these streamlined rules.

Gene (05:38):

Now, if your debts are as much as seven and a half million dollars, that’s for the next two years. I spoke to Senator Chuck Grassley. He is from Iowa. He was one of the primary sponsors of his new bill. And he told me he believes that it could help as many as 40% more businesses facing bankruptcy survive because of these streamlined rules. He’s like maybe a local restaurant won’t be passed on from one generation to the other because of this. But there’s a lot of manufacturing firms that do. And so this legislation will also help businesses continue for successive generations of a family. So listen, let’s hope that your small business never has to consider bankruptcy. Okay? But if you do find yourself in that situation and you’re eligible, then the extension of the sub-chapter five rules may be pivotal for your survival.

Gene (06:25):

If you feel like this is a possibility, it’s important to talk to a bankruptcy expert as soon as possible. Listen, this new legislation is a very good thing for companies that are facing financial troubles. And I think it’s gonna be utilized by a lot of small businesses as time goes on. It might be utilized by you as well. So hopefully this information helps you. You have been listening to Gene Marks in the Small Biz Ahead podcast. If you would like advice and tips and help in running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. I will be back next week with some other news and some thoughts to help you run your small business. Thanks for listening. We will see you then take care.

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