Clearly no company wants to get to the point where they have to file for bankruptcy. However, if you do find yourself in this situation there is some good news.
Due to a new law and a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act there is now an easier bankruptcy process.
The coronavirus (COVID-19) pandemic and its resulting economic affects have left many businesses struggling. Some businesses have already been forced to close permanently. Others may be considering filing for bankruptcy as a preferred option.
New law made better
The law in question is the Small Business Reorganization Act of 2019. That’s right, it was passed just last year and took effect on February 19, 2020, about a month before the pandemic hit the country full force.
The Small Business Reorganization Act added a new subchapter to the U.S. bankruptcy code: Subchapter V. Its purpose is to streamline the reorganization process for smaller companies and, in some cases, improve their odds of recovery.
When signed into law, Subchapter V applied only to companies or proprietors with less than about $2.7 million in debt. However, under the CARES Act, this amount has been temporarily increased to $7.5 million in debt. (Additional details apply; contact a bankruptcy attorney for a full explanation.)
Potential improvements
For small-business owners, Subchapter V could improve the bankruptcy process in several ways:
You may be able to keep your company. Under a Chapter 11 reorganization, business owners typically don’t receive an equity stake in the reorganized company until all debts are repaid. Subchapter V creates a pathway for owners to retain their equity if their disposable income is distributed to creditors over a certain period (generally three to five years) in a “fair and equitable” manner.
You may not need creditors’ approval to proceed. Small-business bankruptcies have long been stymied when one group of creditors object to the reorganization plan. Under Subchapter V, once a bankruptcy court approves the plan, the reorganization may proceed without creditors’ approval.
You may incur fewer costs and get it done more quickly. Subchapter V offers the opportunity to reduce the documentation and level of detail required under a traditional Chapter 11 proceeding. In turn, this can make the process less costly and more expeditious.
Prudent path
Unfortunately, due to the downturn in the economy many businesses may have to consider bankruptcy. The process of bankruptcy can be very difficult, logistically and emotionally. Having advisors you trust can help make the process easier. If you are considering bankruptcy contact your Rudler, PSC advisor at 859-331-1717 and let us help you navigate the process. We can help you analyze your financial position and choose the best path for you.
RUDLER'S TAX MANAGEMENT & PLANNING TEAM
This week's Rudler Review is presented by Becca Johnson, Staff Accountant and Karen Daugherty, CPA.
If you would like to discuss your particular tax situation, contact Becca or Karen at 859-331-1717.
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