By: Thomas G. Zeichman
Special to the Boca and Delray newspapers
Many small businesses have been hit hard by COVID which quickly interrupted cash flows and created debt issues with lenders, landlords, and vendors. Business with up to $7,500,000 in debt are eligible to utilize the powerful new Small Business Reorganization Act (“SBRA”) to address these business debts while maintaining control of their businesses. Many large businesses have filed for Ch. 11 bankruptcy such as Neiman Marcus, GNC, and TooJays. The SBRA provides similar relief available to large businesses in Ch. 11 to manage liabilities through a streamlined proceeding that accelerates the timeline for recovery with lower costs.
The SBRA provides an option for businesses who need to quickly manage their debts to allow for success long term. Understanding the SBRA and other options discussed below will allow business owners to decide the direction of their business or assist in negotiations with creditors. Local businesses have an opportunity to evaluate and pursue plans to thrive long term.
Which businesses qualify for Small Business Reorganization Act?
Companies with less than $7,500,000 in debt are eligible for the SBRA. There are limited exceptions which exclude businesses whose sole activity is owning a single piece of real estate. Other options discussed below are available to the limited number of businesses excluded.
Why file for Ch. 11 bankruptcy under the Small Business Reorganization Act?
- Current cash flows are unable to meet liability obligations.
- SBRA allows a business to modify and discharge liabilities to allow the business to thrive.
- Resolve all liabilities in one case quickly rather than slow piecemeal negotiations and/or litigation.
- Business owner continues to operate the business throughout the case while modifying debt obligations.
Is the Small Business Reorganization Act option going to expire?
- The CARES Act expands eligibility to businesses with debts up to $7,500,000.00; however, this is set to expire in March 2021 if not extended by Congress. If not extended, then the debt limit for eligibility to use the SBRA will be reduced to $2,725,625.00.
Are there other options for businesses?
Not every business will utilize the SBRA. Depending on the particular issues (one active creditor situation vs. multiple) negotiations may be the preferred option with a binding agreement which modifies the liability. Alternatively, there may be an opportunity to sell the business as an operating business or certain assets. Another approach is to bring in an investor; however, as part of due diligence the investor will want to understand how the business will overcome the debt issues. The options available depend on, among other things, the types of debts, the presence of personal guarantees, assets of the business, and prospects of continued income.
Are there actions I can take now?
Business owners do not have to wait until they receive a demand letter or are sued to address debt issues. Instead, business owners can proactively learn about their options, develop a game plan for how they want to proceed, and execute on that plan. Any plan should be tailored to the goals and needs of the particular business by analyzing the financial circumstances and determining which legal approach provides the best chance of future business success.
Thomas G. Zeichman is the chair of the Bankruptcy and Restructuring practice at Beighley, Myrick, Udell & Lynne P.A. with offices in Boca Raton, Broward, and Miami-Dade.