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What You Need To Know About The New Small-Business Bankruptcy Laws

Twisted Root Burger grew quickly, but co-founder now says ‘I’m gonna walk away’ from some locations. What You Need To Know About The New Small-Business Bankruptcy Laws

What You Need To Know About The New Small-Business Bankruptcy Laws

Twisted Root Burger was a Texas success story, expanding from one casual restaurant in 2006 to 24 sites including restaurants, bars, a brewery and a theater. Now, the company is moving fast in another direction—into bankruptcy.

The chain shut down in March. Some sites reopened in June only to be shut down again as coronavirus cases surged. “I’m not gonna open that restaurant at half the revenue,” said co-founder Jason Boso. “I’m gonna walk away from those restaurants. I’m not gonna set myself up for failure.”

Mr. Boso isn’t giving up though. Instead, his decision to put five of the restaurants into bankruptcy is a strategic move to keep control.

The 47-year-old entrepreneur is one of the early adopters of a new law that makes it far faster, easier and more advantageous for struggling small-business owners to file for chapter 11. He expects to cut his liabilities by $500,000 and continue to operate the five restaurants that filed for bankruptcy.

Bankruptcy lawyers expect a surge in small-business failures in the coming months. The new law, they say, will make many business owners realize that filing for bankruptcy might be a better option than struggling for years to dig out of a financial hole, especially with the outlook so unpredictable.

“It’ll never get back to normal business,” Mr. Boso said.

The new law could force more creditors like suppliers and landlords to the negotiating table sooner. Under the old rules, most struggling small businesses liquidated without invoking bankruptcy, using the cash to pay their creditors, according to a 2008 analysis of credit records by Edward R. Morrison, a Columbia Law School professor.

The new rules give small businesses options that make it easier to file for chapter 11, providing them more leverage to renegotiate leases and debts while continuing to operate, often under the same ownership.

Big companies have long used chapter 11, but the law was too costly and complicated for many small businesses. Congress voted to change that last year when it passed the Small Business Reorganization Act, which was designed in part to preserve jobs. The law took effect in February, and in March the coronavirus stimulus law known as the Cares Act temporarily expanded eligibility to businesses with $7.5 million or less in liabilities.

“It was somewhat prescient,” said Ryan Wagner, a restructuring and bankruptcy attorney with international law firm Greenberg Traurig LLP. “It was passed without the foresight of the pandemic.” The law is the most significant change to the bankruptcy code since 2005.

Since the first full week the law was in effect, overall bankruptcies are down compared with last year, but there has been a recent bounce in small businesses filing under the new rules. Total weekly filings during that period have fallen 32% from 2019, according to a report prepared by the American Bankruptcy Institute on weekly filing statistics.

The reasons are likely federal stimulus and grace periods on rent and other payments, according to Amy Quackenboss, executive director of the American Bankruptcy Institute. “I do think there is going to be a surge,” Ms. Quackenboss said.

More than 500 companies filed for bankruptcy under the small-business bankruptcy rules since February, according to the American Bankruptcy Institute. June was the top month for filings with 131 cases; many were filed in states hit hard by the pandemic like Florida, Texas, California, New York and Illinois.

Ms. Quackenboss warned that companies worried about their futures should act sooner rather than later so they have the resources to pay the fees that are part of a bankruptcy. “If you are a small business and you’re looking at the cash you have now and that continues to dwindle and you don’t file now you run the risk of not being able to file in a month,” she said.

Mr. Boso runs his sites as separate business entities. He’s planning to put another six of them into bankruptcy depending on how negotiations with landlords proceed. So far, he says, bankruptcy has cost less than expected and allowed him to cut liabilities.

When Twisted Root Burger shut down in March, the business was already carrying debt from its fast expansion. Costs piled up fast.

At one restaurant, Mr. Boso said he had fixed monthly costs of $75,000 to $85,000. That is “not counting the food I just bought that went bad and I had to get rid of,” he said. “When it closes down, it goes into $150,000 of debt for that one month.”

Mr. Boso quickly owed nearly $1 million for supplies and other costs. A Paycheck Protection Program loan provided cash but did little to help him plan for the next 18 months. That is when he considered bankruptcy.

What You Need To Know About The New Small-Business Bankruptcy Laws

Even before he filed for bankruptcy, he was able to wipe out $500,000 in debt by negotiating with suppliers, and he’s trying to get breaks from his landlords. The new bankruptcy law isn’t clear on how leases should be treated so it would likely be up to a judge if Mr. Boso can’t reach deals with his landlords. He hasn’t had to give up equity, but he does expect to lose some of his restaurants and maybe face lawsuits from creditors who won’t make deals.

Mr. Boso’s restructuring plan anticipates sales down by half in the near future and eventually reaching 75% of their pre-pandemic volume within 12 months, he said. With cases in Texas recently hitting new highs, that could take longer. He also expects each location will have to close at least once every six months to decontaminate if an employee tests positive, he said.

He said small-business owners need to weigh their options, including bankruptcy. “I have a little more experience than a lot of independent restaurants,” Mr. Boso said. “Smaller guys are paying full rents and just hoping they are gonna come out of this.”

 

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