2. What are some top concerns for business owners and employers in the realm of bankruptcy and restructuring?

While 2020 was an active year for commercial bankruptcies, the volume of filings was not as substantial as predicted in the spring. As mentioned above, this is in large part because of government stimulus. Additional recently-enacted stimulus and the rollout of vaccinations give reason for optimism in 2021, but significant uncertainty remains, and we anticipate still a further decline in the economy before any improvement.

Office real estate may become an increased area of concern in 2021. A shift to remote work in many industries may cause many businesses to re-evaluate their office space needs. That could lead to reduced demand and ultimately reduced rent and property value for owners of office real estate.

With respect to commercial loans, many lenders adopted a “wait and see” approach during 2020, with most being willing to grant deferral and forbearance agreements to their borrowers. The patience of lenders may wane, however, as non-performing loans create a drag on portfolio performance. In view of that, we anticipate a moderate uptick in loan enforcement in 2021.

For business owners who are considering reorganization as a means to maintain their business operations but who have granted personal guaranties with respect to their business’s debts, those owners will want to first confirm whether the business’s bankruptcy triggers additional liability under their personal guaranties before they undertake any action for reorganization.

3. What changes may be coming up (or what recent changes have taken place) due to regulations or public perceptions?

Most people believe, based on guidance from medical professionals and government officials, vaccination efforts should allow COVID-related restrictions to be eased sometime in 2021, hopefully putting many businesses that have been impacted by those restrictions back on the path to recovery. While uncertainty remains about how quickly the restrictions can be eased and how soon thereafter the economy will recover, we have at least some clarity about what to expect with regard to that timeline. This greater clarity should help businesses plan and provide banks greater comfort in extending bridge financing, maturity extensions, and forbearances to their customers, enabling those customers to get through the remainder of the pandemic. Greater certainty should arrive as the vaccination efforts continue over the coming months and the public health picture comes into clearer focus.

Despite our anticipation that pandemic restrictions are likely to ease during 2021, some economists still believe there may be a surge in commercial bankruptcies at some point this year as government stimulus tapers off. While additional government stimulus is still planned, some think it may be ultimately insufficient to keep many businesses from filing for bankruptcy, raising a concern about whether there will be sufficient judicial bankruptcy resources and debtor-in-possession financing for small businesses.(1) In the event a bankruptcy surge of significant magnitude begins to emerge, the government may address these concerns, but additional legislative reform is unlikely at the present time.

4. Is the need for bankruptcy relief being exacerbated by COVID-19?

While the pandemic has certainly put an economic strain on many businesses, most notably those relying on the physical presence of customers, such as hospitality, restaurants, retail, and theaters, the unprecedented economic stimulus injected by the government in 2020 appears not only to have staved off any increase in commercial bankruptcies, but perhaps actually decreased them, at least for the time being, relative to historical levels. Through November of last year, 30,310 commercial bankruptcies were filed in the U.S. Assuming a uniform monthly pace of filings, that would result in approximately 33,065 filings for 2020. By comparison, in 2017, 2018 and 2019, there were 39,050, 38,044 and 38,536 commercial bankruptcies filed, respectively. (2) 2020 did see an increase in Chapter 11 filings, with the largest amount of commercial cases filed (6,735 through November 2020) since 2012 (7,289 Chapter 11 cases).(3)

Looking forward, both parties of government seem intent on extending additional stimulus as we move through 2021 in a continued effort to save businesses and jobs, and the vaccination efforts provide real reason to believe that COVID-related restrictions could be eased at some point this year. In view of those developments, there is optimism that COVID will not ultimately force significantly greater numbers of companies into bankruptcy than would have otherwise have filed without the impacts of COVID.

That said, undoubtedly, there are many companies that have merely survived the pandemic thus far and have depleted cash reserves and other capital to do so. Once that capital is spent and government stimulus tapers off, these companies may need to consider bankruptcy.

There also are businesses who may not absorb the full impact of the pandemic for several years yet. For instance, if companies ultimately find work-from-home arrangements to be economical, effective and popular on a long-term basis to a degree that allows them to reduce their office footprints, the office landlords may not feel the impact of that reduced demand until the leases begin to expire. And some businesses may never return to their pre-COVID revenues, because their customers’ preferences may have changed during the pandemic, such as consumers who acquired a new-found preference for online, delivery and curbside services, all of which could lead to additional bankruptcies long after the COVID virus has been contained.

5. How might businesses position themselves for the best outcomes? Are there alternatives?

Be proactive. Every business should evaluate what it needs to sustain its operations through the end of the COVID-related restrictions. In connection with that, businesses will want to consider whether their industry is likely to recovery quickly or more slowly once those restrictions are eased. Once the capital needs of a business are reasonably determined (understanding, of course, that uncertainty still exists regarding just how long it will be until those restrictions are eased and the economy returns to pre-COVID strength), it should identify its sources of potential capital. For many small businesses, this will primarily be its lender. Businesses should engage in conversations with their lenders as early as possible. Most banks, thus far, with encouragement from government stimulus and a desire to maintain their relationships with their customers, have liberally granted their borrowers some form of payment deferral when requested. When justified, banks have also agreed to restructure long-term debt, understanding that the pandemic, while still causing immediate economic strain, will eventually come to an end.

Look to your bank for advice. Some banks have become not only a source of credit to its customers but also a growing resource of business information, even offering classes and workshops covering topics such as finance, management and leadership, sales and marketing, human resources, and information technologies. Most banks will be able to provide their business customers with the latest information regarding COVID-specific lending programs, such as the Paycheck Protection Program and Economic Injury Disaster Loans that were previously-enacted by Congress. Because the government appears committed to extending additional COVID-specific stimulus programs throughout 2021, forming a good relationship with your lender will position you well to take advantage of these programs as they become available.
Business who are suffering from COVID-related restrictions may also want to consider whether they can adapt their operations to help mitigate the impacts of COVID. Many businesses in the restaurant, retail and grocery industries have been successful in quickly implementing new delivery and curbside services. In some cases, these new services have been so successful, that business owners will likely want to consider continuing these services after the pandemic is over.

Unfortunately, business that have been significantly impacted by the pandemic may need to consider bankruptcy. In some circumstances, this may mean winding down operations and liquidating, but in other circumstances, this could mean reorganization, which entails obtaining some form of debt relief, but results in the business operation continuing rather than winding down. With regard to reorganizations, in 2019, Congress enacted the Small Business Reorganization Act of 2019, creating a faster and more efficient reorganization option for small business debtors. Originally, this option was available only to businesses with debt not exceeding $2,725,625, but in reaction to the economic fallout from the COVID pandemic, Congress expanded this option, making it temporarily available through March 27, 2021 to businesses with debts up to $7,500,000. For small businesses in need of debt relief, reorganization under the Small Business Reorganization Act is a far more viable option from a cost and efficiency standpoint than the standard Chapter 11 bankruptcy, which was previously the only option available for reorganization. The goal of this new reorganization option is to allow more small businesses an opportunity to remain in operation.