Armanino Blog

Stop Thinking of Bankruptcy as a Bad Word

by Michael Hogan
June 17, 2020

When most people hear the word bankruptcy, they tend to think of fear and despair and that a company will be immediately destroyed. But often this is not the case. In fact, bankruptcy is one of several restructuring tools that can be used for a fresh start, and it’s a strategy your business may need to consider as you continue to deal with the impacts of COVID-19.

When facing challenges, there are many options to consider first before going down the road of bankruptcy, such as reducing expenses, seeking additional capital or restructuring your debts out of court by extending payment terms, lowering interest rates or refinancing.

But if those strategies don’t work and you can’t pay your bills, Chapter 11 bankruptcy could be a good option to force all parties to come to the table to renegotiate your debt payments and keep your business running or sell the assets through an extended auction-type process. (See our earlier blog post on other options.)

Corporate Chapter 11 bankruptcies were up 48% in May compared to a year prior, as a result of the pandemic. Big-name companies J.C. Penney, J. Crew, Gold’s Gym and Hertz have all announced that they are going this route and will see some sort of reorganization or outright sale as a result. J.C. Penney has already announced that it plans to permanently close 30% of its stores to give it greater financial flexibility.

Recently, Congress refined the rules for small-business Chapter 11s and created a “Subchapter V” election to reduce the cost and time of bankruptcy. This was originally limited to companies with $2.7 million in liabilities or less, but under the CARES Act, the limit has been raised to $7.5 million, opening this option to a larger number of companies.

If you have exhausted all other ways to restructure your debt or your business is not sustainable, you may need to consider a Chapter 7 bankruptcy. Under Chapter 7, you shut down the business and a panel trustee is appointed to eventually pay off your creditors out of your remaining assets. But this is a last resort and is only used if you can’t find a softer landing, such as a sale of assets or other process.

Home goods retailer Pier 1 previously filed for Chapter 11 bankruptcy in February, but after the pandemic hit, it announced in May that it was switching to Chapter 7 and liquidating its assets. Garden Fresh Restaurants, owner of the buffet chains Souplantation and Sweet Tomatoes, also chose to file Chapter 7 bankruptcy and close its doors for good.

Experts expect business bankruptcy filings to rise even more in the next few months, as loans from the Paycheck Protection Program run out and mandated rent deferrals end. Some industries, such as food service, have been hit especially hard. Analysts have predicted that nearly two-thirds of publicly traded restaurants are at risk of bankruptcy.

For any strategy, the earlier you start planning, the better (and getting timely help from experienced professionals can be the key). The weaker your company’s financial situation becomes, the fewer options you have. If you wait too long, you might have no other choice than to declare Chapter 7 bankruptcy and shut down.

June 17, 2020

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