Bankruptcy Code gives some breaks for small businesses

On Behalf of | Feb 1, 2021 | Chapter 11 |

Small business is fighting a tough battle against the economic consequences brought by the pandemic. But four recent amendments to the Bankruptcy Code may help small businesses which are filing a Chapter 11 bankruptcy.

Paycheck protection program

The Paycheck protection program application contained a question on whether a company was a debtor in a chapter 11 case. A yes answer disqualified the company and the Small Business Administration won most legal challenges to disqualification.

Amendments to section 364 of the Code permit eligibility for the PPP if the business debtors obtain bankruptcy court authorization. However, the SBA administrator must send a letter to the U.S. trustee agreeing to PPP loans in bankruptcy. Afterwards, the debtor must complete additional procedures.

Preferences law

A preference or preferential transfer is a payment made by a business to a creditor within three months before bankruptcy filing. That debtor prefers one creditor over others.

A temporary exemption to preference liability was enacted to encourage rental deferral repayment agreements. Landlords that agree to deferment of rent payments and entered lease amendments with tenants starting on March 13, 2020 are protected from those payments being classified as preferences. This was enacted as an incentive for landlords to reach agreements with tenants and vendors which are struggling and considering filing for chapter 11.

Rent

The Bankruptcy code requires that a company must still pay rent even if it files for chapter 11. This new amendment gives a 120-deferral of rent payments to a company that filed for chapter 11. The debtor must show, however, that it has experienced or is undergoing direct or indirect material hardship from the pandemic.

Leases

Under the Bankruptcy Code, tenants must decide whether they will continue or reject non-residential leases within 120 days of the case. Debtors can obtain one 90-day extension that extend this period to 210 days.

These changes extend the 120 days to 210 and keep the once-time 90-day extension. The rent deferral period is not extended. Debtors must begin rent payments after the 120th day.

Debt limit sunset

The debt limit to qualify for the Subchapter V process is important even though it is not addressed in these amendments. Before the CARES Act, there was $2.7 million debt limit to qualify under Subchapter V. This was raised to $7.5 million for one year. This debt limit drops back to the lower amount on March 27 unless it is extended.

An attorney can help your business gather important documents and information and assist it with reorganization. Lawyers can also help assure that your business complies with filing and other procedural requirements.