AVOIDING (BUT PLANNING FOR) BANKRUPTCY 101 IN THE AGE OF COVID-19

No small business wants to file for bankruptcy. Even though a chapter 11 filing allows for reorganization, not having to file is the preferred course. What about in the age of Covid-19? While the current state of affairs, as well as the new Small Business Reorganization Act, makes a chapter 11 a better option, good planning may be able to keep your company from having to file.

Approximately 630,000 retailers have been closed since mid-March. There have been countless reports and articles that the next wave of bankruptcies will be a virtual tsunami, including such well-known names as J. Crew (who filed in May 4), John Varratos (May 6), Gold’s Gym (May 6), Neiman Marcus (May 7), the XFL, Diamond Offshore and Victerra Energy, just to name a few.

Over the first 6 weeks of the shutdown, not many large companies filed. We are now starting to see more and more every day. Why all of a sudden? Because these large companies have spent time preparing to file and are now ready. Your company should be taking the lead from the large companies. That does not mean that you should file, but in taking steps to figure out your best option. So, if you need to file, you will be ready.

As the late, great UCLA basketball Coach, John Wooden, once said, “when you fail to prepare, you are preparing to fail.” This is true whether you are preparing to play basketball or plotting out the future of your company. Pre-bankruptcy planning is the norm among large companies. Often, these companies will have the case effectively done before they ever file, by having a pre-packaged bankruptcy, a pre-negotiated bankruptcy or an agreement in place to sell all of the assets. Even if a company intends to reorganize in chapter 11 and exit as an operating entity, there is still a great deal of planning that takes place before the filing. The company is speaking with its lenders to see if the loan documents can be modified. The company will arrange for a “bankruptcy loan” known as debtor-in-possession financing (if you run out of cash in bankruptcy, the case is generally over). Companies that have multiple locations need to decide which they want to keep (this is one of the things Gold’s Gym did). Even with those they want to keep, they are likely speaking with the landlords.

Planning is “not just for the other guy.” In many respects, pre-bankruptcy planning is more important for a small business, particularly now.

When I sit down with a client that is contemplating filing for bankruptcy, I always ask for the exit strategy. Then I work with the client to plan how to achieve that strategy. Whenever possible, we don’t file until the exit strategy is thoroughly flushed out.

What are some of the things the small business should be doing right now? Here is a partial list:

  1.  First, apply for the PPP (or any other government) funding. It is becoming clear that
    you will be denied PPP funding if you apply for the funding after you file. It is also
    clear that, if you apply before you file and are funded after you file, the funding will
    not be authorized. Also, this influx of cash may be just what you need to be able to
    stay out of bankruptcy.
  2.  Make a number of sets of new financial projections. The first should be short term,
    no more than 2 months and should be based on the current reality and assuming a
    slow ramp up. The second one should be 6-12 months and should be based on
    realistic assumptions.
  3. What steps will you need to take to increase revenue; first, to the pre-shutdown level
    and second, to whatever level you think you can attain?
  4. Where can you cut expenses?
  5. Speak with your vendors about stretching out terms.
  6. If you haven’t already done so, consider drawing down on your line of credit so you
    will have extra cash on hand.
  7. Take a hard look at all of the contracts and decide which ones need to be kept, which
    ones are no longer needed and which ones can be replaced.
  8. Look at your employees. How many will be needed going forward?
  9. Talk to your landlord about redoing the lease. If April rent was not paid, see if you
    can pay it over time or at the end of the term.

Meeting with a bankruptcy attorney makes sense. They are trained in keeping companies out of bankruptcy, not just in filing cases. This person will be able to review your strategy and come up with questions and obstacles you may not have considered.

One of the best pieces of news is the Small Business Reorganization Act. This is a game changer for small companies (for the next year, that means companies with nor more than $7,500,000 in debt). The new law was structured to get the company in and out of bankruptcy within about 4 months. Not only is it fast, it keeps attorney’s fees down. A win-win for the company. While bankruptcy will provide time to have the exit strategy approved by the court (known as a plan of reorganization), time is not necessarily your friend. There are some hard deadlines. For a small business utilizing the new law, there is a 90 day deadline to file the plan. There are other deadlines for cases not under the new law, such as a 120 day deadline to decide whether you will keep or get rid of your real estate leases.

Even if you don’t expect to have to file, you should still be going through these steps to give your business every chance to survive.

Robert M. Bovarnick, Esquire
Bovarnick and Associates, LLC
rmb@rbovarnick.com
www.rbovarnick.com

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all of the information and content in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Nothing in this article is intended to create an attorney-client relationship, which would require an engagement letter. However, if you have any questions, please feel free to email me at rmb@rbovarnick.com