Despite its negative connotation, filing for bankruptcy may be the best course of action for any debt-ridden professional snow and ice management business – or its owner – to take. Bankruptcy provides breathing room to reorganize and create a plan to move forward to profitability. It can also stop the bleeding that might lead to the seizure of the operation’s owner or shareholder’s personal assets.
Today, those who want to see their business survive – or keep their own heads above water – have a new bankruptcy option: the new, so-called Subchapter V of Chapter 11 bankruptcies that dramatically shifts the bankruptcy process in favor of helping small businesses restructure. The Coronavirus Aid, Relief and Economic Security (CARES) Act temporarily increased the debt threshold for filing under Subchapter V bankruptcies, opening it up to even more small businesses.
When a business no longer has sufficient cash flow or credit to pay its debts or to operate its business, it can seek legal protection from creditors by choosing to file for bankruptcy under the U.S. Bankruptcy Code. Several types of bankruptcies, all with the general purpose of giving the troubled business – or the owner of a failed business – can provide a financial “fresh start” in exchange for some level of debt repayment.
Chapter 7 bankruptcy is the most common type of filing in the U.S. Unfortunately, filing a Chapter 7 bankruptcy will close most snow removal businesses because there’s no way to protect property owned by a separate legal entity such as a corporation or Limited Liability Company (LLC).
For a sole proprietor, Chapter 7 wipes out all dischargeable debt – business and personal – in exchange for turning over all non-exempt assets – business and personal – to a bankruptcy trustee. The trustee will sell those assets and divide the proceeds among creditors. Unfortunately, some debt, such as some taxes and alimony are not dischargeable.
A sole owner of a corporation or LLC, filing for Chapter 7 personal bankruptcy might discover a solution to both personal and the snow and ice removal business’s debt problems. In this case, the bankruptcy trustee might decide to take over the corporation or LLC and liquidate and dissolve the business. The owner’s personal Chapter 7 bankruptcy would free up his or her liability for the business’s debts.
Chapter 11 bankruptcies, on the other hand, allow a troubled business to restructure its debt. Partnerships, corporations, LLCs and even a sole proprietor can file a Chapter 11 bankruptcy to reorganize debts and, most importantly, stay in business.
Chapter 11 may be a better choice for a troubled snow and ice removal business that has realistic chance of eventually turning things around. Working with a court-appointed trustee, the business files a detailed bankruptcy plan outlining how it will deal with its creditors.
A business working under Chapter 11 can terminate contracts and leases, recover assets and repay a portion of its debts while discharging others as it returns to profitability. Creditors are paid over time and the business remains a going concern during and after a Chapter 11 bankruptcy.
A Chapter 11 “stay” usually stops collection attempts and provides relief for the debtor while a repayment plan is negotiated. However, any creditor or the bankruptcy court, may seek the appointment of a case trustee to replace the debtor-in-possession if they believe it is in the best interests of the creditors.
Chapter 11, Subchapter V
In the past, Chapter 11 reorganizations were not a viable option for struggling small businesses because of the length and expense of the process. Fortunately, in 2019, the Small Business Reorganization Act (SBRA) created a new form of bankruptcy under Chapter 11, Subchapter V. The new Subchapter V dramatically shifted the bankruptcy process in favor of helping small businesses to restructure.
Subchapter V of Chapter 11, takes the complexity out of the bankruptcy process as well as offering more options. A business owner who wants to declare bankruptcy now has 90 days (previously 120) to come up with a reorganization plan and, most significantly, is no longer required to form a “creditors committee” of interested parties. Instead, a single trustee can be appointed to keep things on tract while the business continues to operate as normal.
To qualify for Subchapter V, a snow removal operation must meet two requirements. First, the total amount of secured plus unsecured debt may not exceed the debt limit (temporarily at $7,500,000 until March 27, 2021 after which it reverts to the old debt limit of $2,725,625). Second, at least half of the debt must have arisen from the debtor’s “commercial or business activities.”
Chapter 13 - Individual Reorganizations
Chapter 13 bankruptcy might be the best option for a sole proprietorship with income coming in. But, since it was specifically designed to help individual debtors with regular income restructure and repay their debts, only individuals can file Chapter 13.
A sole proprietor usually includes both personal and business debts just as they would under a Chapter 7, but can often retain property such as their homes. To qualify, the debt limit mush fall within certain limits (currently less than $394,725 in unsecured debt and secured debts less than $1,184,200).
Reaping Bankruptcy Benefits
No one wants or plans to file for bankruptcy, but it can offer the owners of struggling businesses a chance to stay afloat. While not every business entity can file, or benefit from, each bankruptcy type, there are a number of general benefits including:
Extra time to reorganize. A temporary breather from debt payments and/or renegotiated contracts might be all a snow removal business needs to turn itself around or survive the current economic crises.
A competitive advantage. The ability to temporarily suspend the operation’s debt-service obligations, pay only a portion of some current debts and dismiss signed contracts can result in a more efficient operation than that of any competitors.
Decreased personal risk. Simply shutting the doors of a business doesn’t stop its expenses. Mortgage, rent, leases, insurance, property taxes, security and maintenance costs and other expenses called “carrying costs” will continue after closure. If the operation’s owner is personally liable for any or all of the business’s debts, he or she might lose their savings and/or home. Filing for bankruptcy will, at least under Chapter 7, formally end the business, stop bills from accruing and end many personal obligations.
Stop the bleeding. If a business continues to lose money, a bankruptcy can stop the outflow of cash for which an owner, partner or shareholder might be liable.
Obviously, no small business owner wants to fail and regardless of the spin put on it, bankruptcy is a failure. However, given the chance to take a breath and reorganize, some snow and ice removal businesses might survive the effects of the COVID-19 pandemic, re-emerge, and grow again. Admittedly, the bankruptcy laws are complicated, but doesn’t it deserve consideration? After all, filing for bankruptcy -– whether it’s Chapter 11 or another option – is often the best path for the snow removal and ice management business and its owner to return to solvency. Naturally, a professional can expedite the process and chose the right bankruptcy option.
Mark E. Battersby is Snow Magazine’s financial writer. He resides in Ardmore, Pa.