In COVID-19, Chapter 11 is Your Friend. Honest.

by | Apr 27, 2020

During these extraordinary days, it’s hard to imagine that you or your clients can come out of this in one piece, much less better off than when you went in. I think it’s possible, but it means that you need to call your attorney or CPA to start planning – hopefully before you’ve spent all your working capital. I’m talking about Chapter 11.

Too Broke to File Bankruptcy? 

Did you know that you can be too broke to file bankruptcy? I’ve seen it many times. A business owner holds out until his cash reserves are completely gone then slaps a “Closed” sign on the front door and walks away licking his wounds. The problem is, the individuals who run these businesses are very stubborn. They see the writing on the wall, but they keep hoping and praying for that one client to come through or that one ad to start paying off. Then, all of a sudden, they realize they can’t make payroll, or rent, or the delivery van gets repo’d. Then, it’s too late for them to make use of what is probably their most effective tool for a turn around.

Here’s the thing: To use bankruptcy laws to reorganize your business, you have to pay to play. You need at least a little working capital to keep the business going in the present while you figure out what to do about your past debts. Lucky you if you were one of the chosen few awarded a payroll loan or SBA disaster loan. If you got some of that windfall, good for you. Use it well to get your employees back on the payroll. 

Not Quite There Yet? 

Of course, probably everybody in America knows that the CARES Act loan programs ran out of money within days. Congress had to dip back into the till to extend those programs, and even that won’t be enough to make a difference for some businesses.   

But, let’s assume a more likely scenario. Everybody else got there first and now there’s no stimulus money for your business. No surprise there. 

You may think you’re screwed, but not necessarily. Although it’s helpful for you to have a stash of cash to use as working capital, that stash doesn’t need to be nearly as big as it used to be. In fact, you may be able to file a Chapter 11 for a few thousand dollars. 

This is why it’s so important that you don’t hold out until you’re running on empty. 

The New (and Improved) Small Business Chapter 11

What works in your favor is a new type of Chapter 11 that just went into effect in February of this year. It’s called Subchapter V, and it’s designed for both individuals (including independent contractors and freelancers) and small businesses with total secured and unsecured debt of less than $7.5 million. So, if you’re a restaurant, a bodega owner, a freelance designer, a chiropractor, a plumber, or a feed store, call your attorney.

I know what you’re thinking about now. Yuck! Who wants to file bankruptcy? The bottom line is nobody does. To this I say to you two things. First, swallow that pride before it strangles you. Second, don’t wait until your pockets are completely empty. Think of what money you have left as seed money that you’ll use to grow your business once again. Chapter 11 is an investment in your future. 

If you play it right, you’ll come out of this crisis leaner and stronger than before. Won’t that be kick ass?

Carron Nicks

Carron Nicks

Attorney + Writer

I am incredibly lucky. After more than 25 years as a bankruptcy and consumer lawyer, I am focusing my practice on what I enjoy most: researching and writing briefs, motions, pleadings, articles, online content, and other media, and helping other attorneys efficiently utilize their resources.


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