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Expected Rise in Business Bankruptcies Due to COVID-19

Posted in COVID-19,Bankruptcy on April 30, 2020

The COVID-19 pandemic will undoubtedly have a significant effect on businesses in Louisiana. Both the federal and state governments are working to extend aid packages to support small business, including small business loans and debt relief and Louisiana’s Loan Guaranty Program which offers below market interest rates and no payments for the first six months. Unfortunately, these programs are not likely to be enough to stop a wave of business bankruptcy filings.

Current Assistance is Not Enough

The existing programs meant to support small business owners throughout the COVID-19 pandemic have proven insufficient to help many small businesses weather the storm. The initial wave of funds allocated for small business loans was rapidly depleted, in part because some big restaurant chains obtained loans. Louisiana banks have reported frustrations and snags with getting loan requests processed. Only 1.6 million of the 6 million eligible small businesses were able to secure loans.

Even for those who secure assistance, the loan requirements don’t give sufficient time flexibility to business owner. The most recent round of funding requires that recipients spend 75% of the money within eight weeks on payroll to pre-pandemic employees. Only the remaining 25% can be spent on rent, utilities, health care benefits, and mortgage payments. While stay at home orders might be lifted in two months, business owners fill they will still be operating at limited capacity.

Acceleration of Retail Trends

With Louisiana’s stay at home order extended until May 15th, business owners are becoming increasingly anxious to get back to work. Even when businesses can reopen, it will likely be with heightened social distancing and capacity requirements. These requirements could cause some businesses to remain closed even longer.

The stay at home order and ongoing health concerns have served to accelerate consumer purchasing online, a trend that was taking place prior to the pandemic. Brick and mortar retail outlets were already contending with stiff competition from ever-expanding online purchasing options. Now that consumers are forced to stay at home, they are becoming even more comfortable with online buying. Small companies aren’t able to match the quick delivery options of major retailers. This will put them at a continued disadvantage even when allowed to reopen.

Bankruptcy Filings are Coming

A wave of bankruptcies is approaching. March saw a sharp increase in business bankruptcy filings, and attorneys are seeing signs that the numbers will continue to rise. As businesses take full account of their rising debts and uncertain futures, bankruptcy is often the final option. The businesses most likely to pursue bankruptcy include restaurants, small and independent retailers, and independent oil companies.  Small businesses aren’t alone in their struggle to stay afloat. The clothing company True Religion filed for Chapter 11 bankruptcy in early April, and rumors indicate J.C. Penney and Neiman Marcus may be next.

The recently instituted Small Business Reorganization Act provides some favorable changes, making the decision to file for bankruptcy an easier one. It strikes a balance between liquidation of the estate (Chapter 7) and restructuring of debts through a court approved plan (Chapter 11). The Act enhances the ability of owners to retain ownership of their company rather than losing ownership to creditors while eliminating the more cost-intensive requirements of Chapter 11. It also lowers costs and streamlines confirmation of a restructuring plan.

As businesses learn more about ongoing social distancing requirements, any continued consumer trend for online purchasing, and the federal and state relief options, expect to see bankruptcy filings continue to rise. If you are considering filing for bankruptcy, contact an experienced attorney who can help you understand your options. The Law Office of John W. Redmann, LLC is available 24/7 at 504-500-5000 to help clients with questions and concerns surrounding the financial impact that COVID-19 may have had on their business.