To slow the spread of the coronavirus the Center for Disease Control and Prevention (the “CDC”) has recommended social distancing. Social distancing is and will affect businesses and their employees, customers, and others for the foreseeable future. A drastic decline in economic activity is taking place as people cease going to stores, restaurants, social events and the workplace. Cash flow is tightening for many business and is resulting in furloughing and laying-off of employees. Restaurants, bars, entertainment venues and retailers are expected to be among the hardest hit financially due to the coronavirus. The fallout will be an increase in bankruptcy filings for individuals and businesses in the near term.
Inevitably as individuals are furloughed or laid-off they will default on credit cards, loans, leases, and mortgages. Individuals who contract the coronavirus may incur significant medical debt. In the short term individuals may be able to pay their bills with unemployment benefits and if Congress and the White House approves a stimulus package that will provide cash directly to the American people. Many banks and landlords are offering to work with individuals to defer payments for 30 to 60 days. However, this is a short term solution for a pandemic that will likely be long term.
Though many individuals see filing bankruptcy under Title 11 of the U.S. Code (the “Bankruptcy Code”) as a last resort, it may be the only option to give individuals a fresh start when the COVID-19 pandemic ends. Barring any legislative changes made to the Bankruptcy Code in response to the pandemic, individuals that meet the income requirements will be able to have their debts discharged under Chapter 7. Chapter 13 will be available for individuals that are struggling financially from the pandemic but have regular income to develop a plan to repay all or part of their debt.
Big and small businesses that have had to completely shut down or reduce operations due to the COVID-19 pandemic will fail unless they have sufficient cash reserves or access to additional capital and credit to survive the economic downturn. The Federal Reserve has made emergency cuts to interest rates and the Small Business Administration is planning on providing targeted, low-interest loans to small businesses and nonprofits that have been severely impacted by the coronavirus. If social distancing is extended for months, absent a nationwide bailout, businesses will fail despite these measures.
Workouts, forbearance agreements, loan modifications, and refinancing are often the preferred options of distressed businesses. However, restructuring under Chapter 11 or the newly enacted Subchapter V of the Bankruptcy Code should be considered. The Bankruptcy Code provides significant protections to distressed businesses, including the automatic stay upon filing against any collection activity against the business and its assets, giving the business some breathing space to develop a comprehensive reorganization plan to continue to operate and ultimately remerge from bankruptcy financially healthier. For those businesses that simply cannot survive the COVID-19 pandemic they will have the option to liquidate under Chapter 7.
Banks, and other lenders will be directly affected by their borrowers’ inability to service their debts. Creditors need to be prepared for the inevitable onslaught of defaults that will occur during the COVID-19 pandemic. Creditors have two main options: (1) work with their borrowers through forbearance agreements and loan modifications; and (2) debt collections (which may not be available as some States and jurisdictions are enacting moratoriums on debt collections). Ultimately, creditors will need to be ready for an increase in bankruptcy filings and how to proceed under the Bankruptcy Code.
Individuals, Businesses and Creditors need to be aware of the range of options during these highly uncertain financial times. Debtors’ and creditors’ rights, obligations, and potential liabilities under the Bankruptcy Code can be hard to navigate. If you need assistance understanding how to safely proceed in Bankruptcy Court or out of court workouts, contact the experienced litigation attorneys at Goosmann Law in our Sioux City, Sioux Falls, and Omaha offices.