Many businesses have been hit hard in Massachusetts since the start of the pandemic and smaller businesses in particular are teetering on the edge of filing for bankruptcy or have already fallen off the cliff. The much publicized 1.9 billion dollar coronavirus relief package passed recently in Congress may only bolster some businesses indirectly as the bulk of the spending is designed to prolong unemployment benefit relief for workers and provide a one off cash payment to Americans. This may help to stimulate parts of the economy as people will have more cash in their pockets to spend, but is unlikely to help those struggling businesses facing the drying up of PPP loans.
What is happening to PPP?
PPP or the paycheck protection program will cease on 31st March this year. There is no indication so far that businesses, however badly off they are, will be able to receive any more low cost loans. PPP is at this stage in the final stages of the third round of loans. The program was initiated last year to provide support for businesses which employed fewer than 300 employees, basically small to medium sized businesses. The loans were guaranteed by the federal government but were only designed to cover paychecks, not for any other business expenses or debts. While the program certainly kept a lot of businesses afloat, it didn’t mean that it solved the longer term financial woes for those businesses most affected by the pandemic. The third round of PPP, initiated by the Consolidated Appropriations Act, 2021, and worth $284 billion, was only made available to even smaller businesses than to those benefitting from the first and second rounds. Only businesses with fewer than 20 employees were able to apply for loans.
The other issue is that the PPP program is just a loan. Unlike some similar programs in other equivalent economies, loans do have to be repaid eventually, although there are some circumstances in which the loan may be forgiven up to 100%.
The next step for businesses facing ruin is likely to be bankruptcy
Thankfully, many Massachusetts based businesses have survived the pandemic relatively well. They may have done so with government help or simply found a way out of the downturn by innovating or because of an improvement in background economic conditions. However, despite the fact that the number of bankruptcies in 2020 dropped to a low not experienced since 1985 because of assistance from PPP and other programs, it is expected that this could dramatically change in 2021, with up to a million bankruptcies predicted across the country.
Filing for bankruptcy
Filing for bankruptcy is the last option for most businesses facing mounting debts they cannot repay because their business is unable to survive current conditions. In the U.S. bankruptcies are regulated by the Bankruptcy Code. The main benefit of filing for one type of bankruptcy or another is that it provides relief from having to repay debts in the immediate term and may even allow you to restart your business in the future when conditions improve, depending on the particular type of bankruptcy you choose. The main disadvantage is that having filed for bankruptcy once, it stops you from using that avenue again for some considerable time and will certainly affect your credit rating, making it difficult to raise a loan even if you think conditions have improved.
Filing for bankruptcy is not to be taken lightly. Making a decision about when to file and which type to file for can be difficult so it is advisable to get professional legal advice from an attorney before making a final decision.
A brief description of the types of bankruptcy filings available are given below
Chapter 7 bankruptcy is designed for businesses and individuals in extreme financial difficulty and who are unlikely to be able to repay debts. All property, except that which is deemed exempt, is handed over to a trustee who disposes of it in order to recover funds that are then distributed amongst existing creditors according to a scheme designed by the Bankruptcy Code. Unless the business or individual is later found to have done something improper as defined by the Bankruptcy Code, all debts are discharged and there is no longer any requirement to repay them with some exceptions, such as some taxes, alimony, student debts, etc
Chapter 11 bankruptcy involves the reorganization of a business’s finances according to a plan approved by the Bankruptcy Court. This type of bankruptcy petition is also available to those businesses that lie outside the criteria of those that can apply for Chapter 13.
Chapter 13 bankruptcy is less drastic than Chapter 7 and does not involve the liquidation of a business. It also does not involve the discharge of debts. It is designed primarily at individuals who are still receiving an income and whose debts are not more than an amount scheduled by the Bankruptcy Code. This form of bankruptcy involves the repayment of debts over a longer time period as income allows. The time period for repayment of debts is usually fixed at three years, but may be extended for a further two years. The individual or small business owner who is considering filing for Chapter 13 bankruptcy must prepare a satisfactory plan that outlines how debts are going to be repaid in installments to all creditors over the designated time period.
Whichever type of bankruptcy is filed for involves completing a petition and schedule outlining debts and finances and is submitted to the Bankruptcy Court. There are fees associated with filing for bankruptcy. The fee for Chapter 7, for example, is currently $335. Once the correct forms are filed, a meeting with creditors is scheduled and a trustee appointed to oversee the bankruptcy proceedings. Note that just filing for bankruptcy doesn’t guarantee a discharge of your debts or whether creditors will accept the bankruptcy. It is advisable to have professional legal advice before making a decision about filing.
Should you have any concerns, contact The Law Offices of Richard Mucci for an initial free legal consultation