The 54% rise in business bankruptcies may be artificially low
Business bankruptcy filings are on the rise in South Florida as Covid-19 wreaks havoc on the economy, but government aid programs may be holding those numbers back from where they might otherwise be.
Several high-profile companies have already filed this year, including Neiman Marcus, Lord and Taylor and 24 Hour Fitness, and these cases may well be indicative of the danger facing brick-and-mortar retail businesses and other experiment-based businesses in nobody. as Covid and social distancing issues upend the business landscape.
According to a quarterly report from the United States Bankruptcy Court, Chapter 11 bankruptcy filings in South Florida increased 54% year over year, from 52 in the second quarter of 2019 to 80 in the same period of 2020. Even that number, said Jim Martin, founder of ACM Capital Partners, could be artificially low due to Payment Protection Program loans and other government assistance that provided cash to many businesses throughout the pandemic.
“Deposits are up and the data is a bit laggy,” Martin said.
“The CARES Act and PPP have provided small businesses with a cushion to keep operating,” said Manuel Lasaga, president of economics and financial advisory firm StratInfo and professor of finance at Florida International University, “(but) if we’re not recovering quickly, so many of these small businesses may not be able to afford to continue.
In addition to traditional bankruptcy filings, many debtors who may not be able to restructure are applying for assignments for the benefit of creditors (ABCs) that allow them to liquidate under Florida state law, said Patricia Redmond, bankruptcy lawyer at Stearns Weaver with 40 years. of experience and adjunct professor and founder of the Bankruptcy Assistance Clinic at the University of Miami School of Law.
Small businesses and businesses run by individuals, she continued, can also seek relief under Chapter 11, Subchapter 5 of the Bankruptcy Act, which “allows a small business to go bankrupt quickly. with the help of a trustee whose role is to facilitate getting through the system.
This plan often allows debtors to “restructure the debt in a very positive way for them”, which is especially important for small business owners who are responsible for the debts of the business.
Another concern companies need to be aware of, Martin said, is the potential for the Small Business Administration to bundle and sell debt from PPP loans and other third-party assistance programs, which are sure to crack down. against the fine print. in a way that could cause financial hardship to borrowers.
“It’s really important that borrowers who have taken out these loans understand what they can and cannot do with the money,” he said. “Providers buying these loans will look for defaults, (they will) hold the borrower accountable for repayment, and they will have the ability to then increase the interest rate (if) the borrower is in default.”
These companies have many tools, he said, to get a “good return on these loans at the expense of the borrower.”
According to Lasaga, the pandemic has caused more problems for some industries than others. The most vulnerable areas related to the pandemic, he said, are businesses related to retail, leisure and hospitality, including “restaurants and drinking places,” which have been “ highlighted by the lock”.
Even a modest recovery for these businesses, he said, hinges on a decline in coronavirus cases that would allow them to operate successfully at some capacity. A full recovery to pre-pandemic levels of success, he continued, is unlikely without a vaccine.
Although the recession caused by the pandemic is indeed marked by uncertainty, Martin said the economic effects are somewhat different from those of a more traditional recession, as businesses are aware that a full recovery depends of a vaccine or a cure, although when it might be available is another question.
“Really, it’s just about holding on,” he said. Borderline businesses should try to “preserve their money in every way possible, (think) seriously about the employee base and furloughs, (and) negotiate with their landlords if they rent space.”
Embracing technology and saving money, Lasaga said, are important steps for companies looking to weather the storm. The pandemic, he continued, has only accelerated the trend of time-saving e-commerce and contactless technology, including banking and money transfer programs.
“The sustainability of small businesses today,” he said, “depends on how smart they are with technology.”
For companies considering filing for bankruptcy, Ms Redmond urged caution and informed decision-making. “I would advise someone right now,” she said, “if there was nothing going on that was going to cause them to declare bankruptcy immediately, take a look and look and see what happens before making the decision.”
“Planning for bankruptcy,” she continued, “is probably the best predictor of case success.”
Although bankruptcy is often a last resort for businesses, Ms Redmond said the system could be a valuable tool for businesses in need of restructuring. When a business fails, she says, all is lost. Workers, creditors and owners are all best served when a business can stay afloat, which is the goal of the bankruptcy process.
“(Judges) are problem-solving judges,” she said, “they don’t just call balls and strikes. (They) (try) to help a business stay in life within the law, because they know that when the business stays alive, everyone wins.