Utah Small Businesses Facing Bankruptcy, Pt 1

Blue Bee Bankruptcy is a law firm of local attorneys representing consumers and Utah small businesses facing bankruptcy. We are a month into the national pandemic business shutdown, and we’ve been fielding calls by small businesses seeking direction. So, we designed this 3-part series to give them the tools to assess their situation as they develop strategies for the rest of this year.

“Small business is the backbone of the American economy,” is a common statement, and the numbers back this up. According to the Small Business Administration, small businesses account for half of all private-sector jobs and half of private-sector output. Despite their importance to our nation’s economic prosperity, small businesses rarely have resources available for an unexpected closure.

The tipping point

If we could pinpoint the exact moment things went from bad to worse, that would be March 11, 2020. China first admitted the existence of a novel virus in Wuhan on January 7, 2020. The first reported case in the U.S. was 2 weeks later. Through February and into March, all indications from the Trump Administration were that the virus was under control. Then we hit a tipping point on March 11, 2020. On that day, the NBA announced it was suspending the season after Utah Jazz center Rudy Gobert tested positive for COVID-19, and Tom Hanks announced he had the novel coronavirus. Later that evening, President Donald Trump delivered a nationally televised address meant to bolster a shaky stock market.

The next day began with a massive stock selloff, tripping automatic triggers that suspended trading. By the end of the day, MLB, NHL, and MLS all announced suspended seasons. The day after that, President Trump declared a national emergency. Seemingly overnight, small businesses in Utah and nationwide faced the one thing that never crossed most people’s minds ~ a national pandemic.

It’s important to reflect and appreciate just how quickly this situation evolved.

Are you personally liable?

The most critical issue of Utah small businesses facing bankruptcy is assessing personal liability. Make a list of all your personal and business-related debts for which you are personally liable. Understanding the extent of your liability helps identify exposure. Maybe it is your home, transportation, life savings, retirement, health or sanity.

If you are doing business as a sole proprietor or partnership, every business debt you incur is your individual liability. Whereas, if your business is incorporated (C-Corp, S-Corp, LLC, PC, PPC, etc.), you are not personally liable for business debts UNLESS you sign a personal guarantee.

Is your small business viable?

People start a small business because they have devised a solution to an identified problem. It is time to ask, “Does the identified problem still exist in our new marketplace? Does my solution still solve that problem?” These are particularly tricky questions for a small business owner to answer honestly. Nobody wants to admit they have become obsolete.

Consider restaurants and bars operating on small margins. If they can only reopen by adhering to social distancing, maximum occupancy could shrink by as much as 75%. The numbers do not work without radically changing the business plan. Besides, many people socialize in bars and restaurants because of the crowds. By comparison, fast-casual and drive-thru eateries stand to fair better, as patrons show a willingness to take their food to go.

And when will be the next time you needed to get something dry cleaned, need an oil change, new clothes, or a new car for that matter? The markets for these goods and services have abruptly ceased, and it will be a long time before they return.

If your business is still relevant

Maybe your business continues to fill a need, and the “new normal” does not eliminate the delivery of your solution to the marketplace. The best long-term survival strategy may be the reorganization of business debt. The United States Bankruptcy Code provides a proven pathway to business survival by readjusting outflow to match the monthly income of Utah small businesses facing bankruptcy.

If you are a sole proprietor or part of a partnership, Chapter 13 can give you a 5-year plan of reorganization. The plan can reduce the balance and monthly payments of secured debt and allow proportional payments to unsecured creditors at no interest. At the end of the plan, the discharge eliminates any remaining balance owed to the “unsecureds.”

For incorporated entities, the Small Business Reorganization Act allows the reorganization of any small business with total corporate debt of less than $7,500,000. Chapter 11 is available for any business if it proves to be the best fit under the circumstances.

Whether it is restructuring equipment loans or reducing the balance owed to the SBA, the greatest limitation of bankruptcy strategies for saving a business is the imagination of your bankruptcy lawyer.

If it’s time to cut your losses

You have poured your heart, soul, money, sweat, and tears into your small business, and it is difficult to accept defeat. Remind yourself that you cannot control the cataclysmic and poorly forecasted change in the economy.

If you have come to the uneasy conclusion that your business cannot survive the near future, you need to stop the bleeding. Having already determined the extent to which your assets are at risk, you need to understand how bankruptcy changes the calculation.

Continue to Part 2 of this series for a discussion of how to suspend your failing business and whether a liquidation bankruptcy is necessary.

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