Angela Zwirecki Miller, Bankruptcy During COVID-19

Bankruptcy attorneys: Times are tough for small businesses, but options exist

Bankruptcy attorney Matthew Lazroe during the past several weeks has heard from Buffalo business owners in a lot of different sectors.

“They range from tattoo places to restaurants to local construction people that either have businesses in their name or under a limited-liability corporation,” he said.

Mandated closures due to the coronavirus pandemic have put some businesses in a bind.

Business owners are looking for guidance on legal options as well as what they can do to stave off creditors.

“It’s such uncertainty out there that no one knows if the businesses are going to be allowed to open up in the next month,” Lazroe said.

Meanwhile, most courts are closed but those of the bankruptcy variety have trudged forward without face-to-face meetings. Some proceedings have been pushed, but others are taking place via conference calls.

“The main thing that these small businesses in the area can do is, while they have the free time, get all their paperwork together and up to date and then call their lawyer,” Lazroe said.

He and other attorneys have fielded countless calls from clients on what to do.

“The increase in inquiries is from otherwise viable businesses that find themselves in a situation where a restructuring is required because their respective business either is, or anticipates it will soon be, facing a liquidity crisis,” said Angela Zwirecki Miller, partner at Phillips Lytle LLP.

Those businesses, she said, need access to money now to fund the shortfalls they have incurred by not being open.

Others that are open have hardships, too, due to things such as supply chain disruption, social distancing guidelines, travel restrictions and patron fear, Miller noted.

“Regardless of the cause, businesses are suffering and evaluating their options,” she said.

Some relief is available through the package of emergency loans offered through the U.S. Small Business Administration.

Lazroe heard from a client who immediately applied last week but was told they had 600,000 businesses in front of them set to receive payouts first.

“Who knows how long that is going to take?” he said.

Fear for businesses has come in waves, said Diane Tiveron, managing partner at HoganWillig PLLC.

“At the very beginning, it was fear and questions on how to know whether to stay open or not,” she said. “We were trying to work through that and now I have clients who are trying to work through the opportunities that are available through the SBA.”

A plus in all of it for businesses is creditors currently don’t have much leverage, the attorneys said.

“That hammer that most creditors have of involving the court is on hold,” Tiveron said.

She added that there are only limited ways until the courts fully open where creditors can acquire or enforce a judgment.

Options for businesses when it comes to bankruptcy are reorganizations through a Chapter 11 filing or liquidation via a Chapter 7 proceeding.

During typical times, Tiveron said her goal is usually to talk businesses through what they can do. A Chapter 11 filing can be complex, while a Chapter 7 route ushers in finality.

“Bankruptcy is just not a good stopgap measure right now from my perspective,” she said. “I think I’m talking to enough businesses where there’s enough uncertainty (in proceeding that way) and there’s some possibility of some assistance or some loans that bankruptcy (in this becomes) taking care of a headache with a lobotomy.”

A newly-available option predated the COVID-19 ordeal but launched this year following 2019’s passage of the Small Business Reorganization Act. It offers a “better path” for businesses to restructure and rehabilitate their financial affairs effectively, according to the American Bankruptcy Institute which pushed for the bipartisan legislation.

Tiveron said she wasn’t aware if any businesses had utilized it yet in Western New York, but it could nonetheless be a route some could choose. Businesses are eligible so long as they have not accrued more than $2,725,625 in secured and unsecured debt as of their filing dates.

Lazroe and Miller said some may find that it’s a cheaper, more straight-forward and streamlined route to get things in shape.

Raymond Fink, partner at Lippes Mathias Wexler Friedman LLP, said that last time he recalls being asked so many varying questions was in the late 2000s during the Great Recession.

“This is different because the light at the end of the tunnel is intimately tied to the COVID-19 cases,” he said.

Last time around, hardship was brought on by a purely financial crisis that spanned industries.

“This is very unique because what’s precipitating the financial crisis is a health-care crisis,” Fink said. “You just don’t know when this is going to end. It’s certainly going to depend on the ability to manage the health-care crisis.”

Whether bankruptcy is the best route for a business should be looked at on a case-by-case basis, he said.

“I think the longer this goes on for the non-essential businesses that are shut down, the more difficult and challenging it’s going to be for a lot of businesses to even come out of this,” Fink said. “Bankruptcy is certainly there as a vehicle to help businesses that can reorganize or come out of the COVID-19 tsunami, but in the end you need to have a business that you can restart.”

Businesses that may be hit hardest if the pandemic prolongs for three months or so could be restaurants, he said.

“It’s really hard to regain your footing at that point,” Fink said. “For any business to survive, it needs revenue.”

Lazroe said now is a good time for businesses to plan for what’s next, whenever that may come.

“With things in the short-term being so uncertain as far as when they’re going to be allowed to be generating money again, you can preserve your assets now,” he said. “Filing bankruptcy freezes everything and it gives you a chance to look forward when you’re able to reopen to set up a plan to resolve all the debt.”