There are some newly created options for restaurant owners if they find they can’t pay their rent, vendors, or lenders during the ongoing COVID-19 pandemic crisis. Under a new law that went into effect in February 2020, shortly before the coronavirus pandemic began — the Small Business Reorganization Act— it’s easier and less expensive for small businesses to file for Chapter 11 bankruptcy. And the business does not need to shut down or be auctioned off. 

With most landlords “we are not in this together.” Despite the government shut-down of many non-essential businesses, our experience has unfortunately been that landlords are not offering much relief at all to tenants despite the devastating financial losses to these business owners. They may delay rent payments but are not offering rent reductions or forgiveness. They are just giving more time to pay. The problem is that the economy is not going to rebound quickly and tenants are unlikely to be able to pay even higher rent payments.

Business owners may get some relief by calling and negotiating with vendors and lenders. They may be able to modify payment terms to be able to afford payments over an extended period or even have penalties waived or interest reduced. The key to success is having some realistic revenue and expense projections for the coming 12-36 months, depending on how large the debt is and how long it might take to repay. It is important to re-negotiate all of the debt terms because payments may be only part of the lender’s requirements. The loan may also have financial performance metrics that the borrower must meet. Those terms need to be revised as well for a wholistic approcach to modifying the terms of the loan.

It might be counter-intuitive, but debt consolidation may not be a good move for most business owners. In a bankruptcy situation, a greater number of creditors can be beneficial in terms of negotiating reorganization terms. 

The new Subchapter V of the Chapter 11 bankruptcy code allows small businesses with up to $7.5 million in debt to seek reorganization with the goal of keeping control of their business and their equity.  This higher limit was put in place with the CARES Act. Under the new bankruptcy laws, a business submits a petition with all of its debts seeking bankruptcy protection. The business has 90 days to submit a 3-5 year repayment plan. The business will be required to pay all of its discretionary income to its creditors, and pay off as much of the debt as it can during the repayment period. The rest of the debt will be discharged if the debtor successfully completes its repayment plan, and the business gets to keep its equity.