As businesses of all sizes braces for the impact of COVID-19 over the next several months, and possibly years, the rise of bankruptcy filings is inevitable.

The impact on small businesses in particular is likely to be devastating. While you may be familiar with traditional filings under Chapter 11 of the Bankruptcy Code, you may be less familiar with the recently enacted Small Business Bankruptcy Reorganization Act (SBRA), which was expanded in light of the COVID-19 pandemic.

The Bottom Line

The COVID-19 pandemic and the drastic measures taken in an effort to mitigate its adverse impact have sent shock waves throughout the US and global financial systems. COVID-19 and measures including travel bans, shelter-in-place orders and widespread business closures have caused precipitous changes in customer spending and demand, supply chain disruptions, sharp declines in revenue and other operational challenges across a wide range of economic sectors. Businesses worldwide now confront unprecedented and mounting challenges and distress.

Virtually every business—regardless of its size, nature (manufacturing, service, professional, tech) or particular industry—is currently suffering significant distress as a result of the unprecedented shutdown of huge portions of the U.S. (and global) economy. It is therefore clear that the number of businesses (and individuals) who will seek bankruptcy protection in the coming months will be enormous.

Many municipalities are facing strained budgets, or possibly worse, in light of severely reduced sales tax income and aggravated further by actions or inaction of the state legislature. It is difficult to predict with all the variables in play where municipalities’ revenues are going to be in the next six months or longer. This may result in a municipality being figuratively put “out of business.” If a municipality cannot pay its bills or bond obligations, there is a little known and seldom used provision in the Bankruptcy Code that should be explored — Chapter 9.

As the COVID-19 pandemic marches on, more homeowners than ever are seeking assistance from their lenders.

On April 24, the Small Business Administration published additional interim rules which clarified that the SBA would not allow Paycheck Protection Program (PPP) loans to be used for debtor in possession (DIP) funding by stating as follows:

Can businesses obtain a Paycheck Protection Program (PPP) loan to fund their chapter 11 bankruptcy cases? This question has been looming over companies facing bankruptcy and in immediate need of financing. On April 15, the Small Business Administration (SBA) issued its answer.

The global COVID-19 pandemic continues to wreak havoc on the U.S. economy. Stay at Home orders issued by governors in all but a handful of states required, with certain exceptions, closure of all but those businesses deemed to be “essential.” While Congress has passed a series of measures meant to stem and mitigate financial impacts, a very large percentage of American small businesses will struggle to survive as states, counties and cities slowly lift restrictions and permit businesses to reopen.

How does one go bankrupt? Two ways — gradually and then suddenly.

(Paraphrase of Hemmingway, by way of CFTC Chairman Heath Tarbert)