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Small business bankruptcy in a time of COVID

The coronavirus pandemic has hit one sector of the economy particularly hard: small businesses. Staying afloat can be challenging even in a favorable economic climate. The COVID downturn has had a crushing impact on small business owners across the country, with many shuttering their doors permanently. For some, bankruptcy is the only way out.

Fortunately, there is a glimmer of good news amidst all the bad: Recent changes to federal bankruptcy law have made it more accessible, less expensive and less time-consuming for small businesses to reorganize through bankruptcy.

Business bankruptcy

Chapter 11 bankruptcy - which allows businesses to reorganize, establish a realistic payment plan and, hopefully, re-emerge profitably - is notoriously complicated, time-consuming and expensive. The Small Business Reorganization Act of 2019 (SBRA) created a streamlined alternative for businesses with less debt. Subchapter 5 bankruptcy allows small businesses to pursue reorganization on a faster timeframe. This path is far less complicated and costly than a full-fledged Chapter 11 bankruptcy.

However, businesses can only qualify for Subchapter 5 bankruptcy if their debt is under a certain limit. As originally set out in the SBRA, that limit was $2.725 million. Congress raised that limit to $7.5 million with the recently enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act). This change - which will last a year - allows more businesses to take advantage of a simpler, faster and less expensive bankruptcy reorganization.

Act now to consider your options

Because of the limited timeframe for the lower debt limit, now is the time to consider Subchapter 5 bankruptcy if your business is struggling. Speak with an attorney about your options.

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