April 22, 2021

The Bankruptcy Crisis Amidst COVID-19 Large and Small businesses across the U.S. are in the verge of filing for bankruptcy

When the lockdown was abruptly announced in March of 2020, people were ordered to stay home, and businesses were forced to shut down temporarily. The lockdown meant that businesses, especially small companies, are not profiting because there is no customer access. When the lockdown was lifted, businesses were still restricted from following new COVID-19 regulations. In NYC, all restaurants must-have outdoor dining, and stores all over the U.S. need to monitor the number of visitors carefully. Online retail and delivery applications have much-helped businesses. Some businesses were able to survive the new restrictions, while others are not so lucky.

During the COVID-19, no businesses are safe. Companies are losing revenue every day, prompting them to file for bankruptcy. Retail stores such as Century 21 that has been a household name in NYC has filed for chapter 11 bankruptcy. White Century 21 stores are still open. Filing Chapter 11 bankruptcy gives them loans within a time frame to set things back on track. Many families-owned restaurants choose to permanently close their locations because they cannot bear the cost while not getting any sales.

Household named retail stores, and restaurants are filing for bankruptcy across the U.S. More than 250 companies have declared bankruptcy in 2020 and blame the COVID-19 virus for causing hardship. Companies range from retail, restaurant, hotels, airlines, and even oil producers are just some of the many businesses challenged by the pandemic.

Companies have similar patterns as to why their businesses are failing. There are just not enough customers or sales. While online retail can be a viable tool during the pandemic, it’s not enough to bring revenue only from one source, especially when the companies emphasize customer services. While the lockdown has been lifted, the number of COVID-19 cases is still growing. Thus people are still very much scared to interact with others or even leave their houses. States all over the U.S. have also implement restrictive rules. For example, the N.Y. government did not allow gyms to open, which means gym owners and other physical health businesses don’t have an income.

The companies are struggling to bring their businesses back on track; many have sought a different approach to reorganize their finances. Companies have liquidated some of their assets, and others have their employee on payrolls. Many retail companies have decided to close some of their branches, such as Ann Taylor. She is considering to close 1,000 stores. Companies have also furloughed their employees; Gold’s Gym had furloughed 4,600 employees since the beginning of lockdown in March. Neiman Marcus had just opened its fantastic store by the Hudson Yards in NYC. A year later, in 2020, Neiman Marcus had filed for bankruptcy and was forced to shut down their new store.

For larger companies, it makes more sense to file for bankruptcy when sales are gone. Companies have better access to the financial market, and investors than small businesses do. Companies can reorganize their interactions with a bank loan within a specific time frame; this can regain business activities.

Small Businesses

Thousands of small businesses across the U.S. are filing bankruptcy. The MetLife & U.S. Chamber of Commerce Small Business Coronavirus Impact Poll result shows that 58% of small business owners fear that they have to close permanently. Small businesses are especially feeling the financial burden as they do not have the same access to financial markets and investors as larger companies do. According to Yelp, an online service dedicated to reviewing businesses, the data show more than 80,000 businesses closed down permanently from March to July. Of 60,000 were small businesses, mostly local businesses and firms that have fewer than five branches. Moreover, American Bankruptcy Institutes reported that 800 small businesses file for chapter 11 bankruptcy from mid-February to July 31.

Small business owners are not able to bear the cost of opening their stores during COVID-19. Still, many owners choose to close their stores indefinitely or permanently rather than filing for bankruptcy. Filing for bankruptcy may cause more burden to small business owners. The default cannot create more revenue. It will most likely hurt the owner’s credit score. As a result, owners will have a more challenging time to rebuild their businesses. Filing for bankruptcy will give loans to businesses and time for owners to rebuild. However, unlike big companies, more time does not make any difference for small businesses, especially during the unpredictable COVID-19 pandemic.

More small business owners choose to shut down their businesses altogether. It’s just cheaper for owners to close their doors and turn off electricity rather than filing for bankruptcy that might pose a challenge in the future.

Government Incentives: Stimulus Pay

For large corporations, the best bet to stimuli business back is to file for bankruptcy or depending on investors, but this is a stretch. Larger companies have better access to the financial market. They have considerably larger assets worth millions of dollars that they could partly liquidate. However, small businesses do not have the same joy to liquidate assets or file for bankruptcy. In the wake of COVID-19, the U.S. government has initiated the supercharged by the Coronavirus Aid, Relief and Economic Security (CARES Act) under the Subchapter V of the Bankruptcy Code, which is a part of the Small Business Reorganization Act (SBRA).

The SBRA was in effect in February of 2020, right before the lockdown happened. The economy was already facing a downturn in 2020, but things escalated quickly with the spreading of COVID-19. Before Covid-19, the SBRA is only qualified for people who engage in commercial business and aggregate non-contingent, liquidated debt of not more than $2,725,625.

After lockdown, the CARES Act is eligible for small business debtors that elect Subchapter V. The CARES Act also raised the debt limit from $2,725,625 to $7,500,000 until March 2021. Lastly, the CARES Act is also qualified for corporations, including LLCs and partnerships. However, there have been reports that business owners have abused the CARES Act, using the fund for personal gains. The loan should only be used to reorganize the business and not for personal needs.

The COVID-19 pandemic has significantly challenged the economy. When can the economy rise back with its uncertainties, most importantly, when can a business run as usual? These are unanswered questions that people want to know. Still, business owners have devised a way to run businesses safely and follow state restrictions under this indefinite time. Though sales and business weren’t as good as before, some people cannot afford to lose their shops and restaurants, especially small and family-owned businesses.