In the second quarter of 2020, the U.S. economy suffered its sharpest downturn in over half a century. This dramatic downturn caused more U.S. retail companies to seek bankruptcy protection in the first half of 2020 than in any other comparable period and left over 23 million Americans out of work. The gross domestic product shrank 9.5% in the second quarter of 2020, further weakening the ability of small businesses to recover. The pandemic continues to foster economic uncertainty heading into the fall and winter of 2020. Leading bankruptcy scholars and economists believe a surge in bankruptcy filings is likely inevitable, and have requested Congress to increase the bankruptcy courts' capacity to handle the eventual unavoidable bankruptcies resulting from the pandemic's impact on the economy and markets.
Although the country has started to reopen, the process is cautious and slow while the virus continues to stoke fear. With the federal stimulus packages sent out earlier this year long gone, and other short-term consumer protection steps taken by the federal and state governments expiring by the end of summer, consumers will feel pressure and have few options. Under the circumstances, individuals or businesses should consider bankruptcy.
With continued volatility expected, it is wise to be proactive, informed, and prepared. Lavelle Law, a law firm based in Schaumburg, is offering a seven-installment podcast on bankruptcy basics for businesses and individuals. Managing Partner Ted McGinn said, "it is important for small business owners to realize there are options to deal with the claims from landlords, suppliers, or other creditors to keep a business going, rather than just closing and losing years' of goodwill with the community."
The Chapter 11 Section of the Bankruptcy Code was recently amended to enable a small business to file a reorganization in a cost effective manner.
The Subchapter V can save the business. Such a bankruptcy allows a business owner to force a creditor to accept a payment plan over a 3 to 5 year period. That additional time provides the business the ability to rebound and preserve the value built over the years. A Subchapter V can also allow a struggling business to keep its workforce employed and satisfy its vendors, rather than terminate employees that will lead to more financial hardship beyond just the business' creditors.
In addition, there are many misconceptions related to individual bankruptcies. Will the debtor lose their assets? Will the debtor receive a discharge? How will a filing impact credit?
"Because of the unique set of circumstances many people are facing," McGinn stated, "it is important for individuals to know their options in these tough economic times." The Lavelle Law series is designed to present the pros and cons of bankruptcy in a clear way. Depending upon an individual's goals and the unique facts in their case, an appropriate bankruptcy strategy could be developed to address creditors while maintaining assets and moving forward.
• Tim Hughes is shareholder and Ted McGinn is managing partner with Lavelle Law, based in Schaumburg. Contact Hughes at firstname.lastname@example.org.