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What's the Right Small Business Bankruptcy Option During the Coronavirus Outbreak?

Bankruptcy Options for Small Businesses Affected by COVID-19

Learn how filing for bankruptcy under Chapter 7, 11, 12, or 13 can help a small business owner during the coronavirus outbreak. Learn whether the new subchapter V of chapter 11 can help you.
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abi program notes May, 21, 2020


  • Stabilization funding for small businesses

    • Paycheck Protection Program (PPP)
    • Expansion of Economic Injury Disaster Loan Program by $10 billion
    • Expansion of small business bankruptcy filing limit to $7,500,000 for next year
  • Financial assistance to businesses, states/municipalities and liquidity to capital markets


Main Street Lending Program Under Section 4003(b)(4)

  • Treasury to invest $75 billion, and Federal Reserve to invest an additional $525 billion, through an SPV that will purchase 85% or 95% participation interests in eligible term loans made by banks to eligible mid-sized and small US businesses

  • Three different facilities, with eligible loans ranging from $500k to $200 million

  • May be new term loans, or incremental tranches of loans made prior to April 24, 2020

  • Interest rate: LIBOR + 3%, with four year maturity

  • Restrictions on capital distributions, compensation of highly paid employees, payments on other debt, and reduction of other credit

  • Will pose some restrictions on eligible lenders, and lenders should consider risk mitigation strategies

  • Borrowers must attest that, after giving effect to the loan, they do not expect to file for bankruptcy during the following 90 days (and that they have a reasonable basis to believe they will have the ability to meet their financial obligations during that period)

  • The program is not yet operational

Venture-backed Start-ups and Private Equity-backed companies May Be Left Out of PPP

Small Business Association (SBA) Affiliation Rules

  • Narrow exception to affiliation rules provided for “accommodation and food” industries, franchise operators and companies who have received assistance from a small business Investment Company.

  • The SBA’s affiliation rules and financial certifications are used to determine whether a business affiliation can influence whether a given company qualifies as “small” and whether relief will be available.

  • The affiliation rules may prevent venture-backed start-ups and private equity-backed companies from access to small business relief under the PPP.

  • For example, if a start-up has 20 employees, its affiliation with perhaps thousands of other employers at its sponsor’s other portfolio companies may prevent it from qualifying for loans or grants under the PPP.

Observations about the Restructuring Cycle Today

No business operations, no cash, no value

  • Companies and their lenders and bondholders recognize that the closure of many businesses has eliminated cash flow while expenses still continue to exist.

  • Lenders and bondholders have shown a willingness to enter into standstill agreements to preserve the status quo to the extent possible for as long as three months.

  • There is a serious effort to reduce the number of immediate bankruptcy filings in recognition of the inability for anyone to realize sufficient value as part of a bankruptcy process.

  • Lenders and many landlords are providing extensions but requiring borrowers who qualify to apply for loans and grants under the CARES Act and pay a portion of the proceeds to the them pursuant to the extension.

What Should Companies Do Today?

  • Borrowers under PPP or MSLP must be prepared to produce documentary evidence to demonstrate that proceeds were used for allowable uses.

  • It will not be enough to “demonstrate accountability” or “address scrutiny.”

  • Well advised companies will be able to present documentation to clearly prove that they used the proceeds in a permissible manner.


Automatically apply your county expense standards and state income standards to your means test calculation.

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