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How to Get Your Business Ready for the Next Round of Financial Distress

I’ve written previously about the likely increase in delinquencies and bankruptcies coming this year, but the numbers have yet to back up that prediction.  In 2021, according to the American Bankruptcy Institute, consumer bankruptcies decreased by 24%, commercial bankruptcies decreased by 31%, and Chapter 11s decreased by 48% from their 2020 numbers.

Now that stimulus money has dried up and certain collection and eviction moratoria have expired, hungry creditors will force more individuals and businesses into bankruptcy, right?  Not yet.  Statistics published by the ABI indicate January filings were down by 21% overall, and business Chapter 11s were down 53%!

Although at-least temporary normalcy is returning to the COVID-weary workplace, business and consumer confidence is affected by high inflation, certain interest rate hikes, supply chain issues, employee departures and shortages, and now, by war in Europe.

Attorneys can help advise folks on each side of this anticipated distress.

Creditors, including businesses large and small and financial institutions, need to brace for increasing delinquencies in their receivables and likely bankruptcies. This may mean requiring COD payments for goods and services, regularly monitoring receivables, and working with your customers/obligors to help them avoid bankruptcy through forbearance agreements or other payment arrangements and workouts. It’s also a good idea to start pulling together records, including written communications and contracts, with customers who may be struggling financially. An attorney can help you assess what your rights are in the event of a default.

If an obligation is supposed to be secured by collateral, make sure your security interest is perfected by filing or recording in the appropriate state or local office. And take advantage of legal counsel—particularly if a bankruptcy is filed. Be aware of the automatic stay, deadlines for proofs of claim, objections, and plan ballots, and any rights you may have to collateral. In certain instances, a bankrupt debtor may be granted permission to pay pre-bankruptcy debts owed to certain “critical vendors” in full, and an experienced attorney can help a creditor get paid.

Businesses and consumers in financial distress are also encouraged to talk with attorneys about their workout options as well as their rights under the Bankruptcy Code. Subchapter V Chapter 11 bankruptcies have provided great relief to many small businesses since taking effect in 2020.  They allow small businesses to take advantage of Chapter 11 benefits less expensively and more efficiently than in traditional cases. Congress is considering extending the COVID-era expansion of small businesses’ debt limit for these cases. It currently sits at $7.5 million, but that is scheduled to revert to $2.7 million before the end of this month.  So now would be the time to consider a subchapter V filing if your business needs it and qualifies.

Whichever side of this dance you’re on, good counsel can help you move strategically and effectively. If your business is experiencing distress, or it is owed money by a customer in distress, the earlier you get your attorney involved, the more options will be available to you.  The attorneys of Dalton & Tomich have the experience and knowledge to guide you through these issues.

DISCLAIMER:  This article is intended as informational only and not as legal advice.  In no way does this create an attorney-client relationship between Dalton & Tomich, PLC, the author, and/or any individual or entity absent a separate written agreement.

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The attorneys of Dalton & Tomich, PLC have the experience and the knowledge to work with you to develop a legal solution that helps accomplish your goals. Our collaborative approach has helped leaders like you grow businesses and banks, develop and expand churches, and build nonprofit organizations nationwide.