BANKRUPTCY FALLOUT FROM THE COVID-19 PANDEMIC
The COVID-19 pandemic has shaken the global economy to its core, altering the way countless companies conduct business. Unfortunately, one of the unexpected results of the COVID-19 lockdown has been the closure of many businesses that cannot afford to keep their doors open and their staff paid without steady streams of customers. Businesses have been closing since February, and we are now seeing a new wave of bankruptcy as fallout from the COVID-19 pandemic.
BANKRUPTCY WAVE ACROSS AMERICA
In just one month of 2020, more than 700 companies sought bankruptcy filings in the US, a 48% increase from the previous year during the same month. A few of these companies include Neiman Marcus, J.C. Penney, and Gold’s Gym. Companies that were already struggling prior to the Coronavirus pandemic have gotten into worse financial trouble since state governors have started imposing new restrictions on businesses to slow the spread of the virus.
Every state’s leadership carefully assessed the impact of the COVID-19 pandemic in their jurisdictions and issued restrictions accordingly. Some states banned all nonessential travel, ordered nonessential businesses to close their doors, and issued shelter-in-place orders for their citizens. The resulting economic stagnation has made things very difficult for service-oriented businesses in particular, such as restaurants, gyms, and retail stores that depend on foot traffic.
FINANCIAL RELIEF FROM CARES
The federal government passed the CARES Act into law in March of 2020, and it included the largest economic stimulus bill passed by US Congress. It included more than $2 trillion of economic relief to respond to the COVID-19 pandemic. While many businesses received funds through the Paycheck Protection Program and Economic Injury Disaster loans through CARES, the relief was not enough for many struggling businesses, and now those businesses’ leaders are seeking their final option for recovery in the form of bankruptcy filings.
Bankruptcy is an often-misunderstood financial vehicle. For companies, a bankruptcy filing can allow them to restructure debts, streamline their operating budgets, and emerge leaner and more competitive than they were before. Financial analysts predict even more bankruptcy filings will come in 2020, primarily from retail companies and energy sector organizations that have been hit by plummeting oil prices and very low demand due to the various travel restrictions in place during the COVID-19 lockdown.
POTENTIAL FOR BOUNCING BACK AFTER COVID-19
If the pandemic passes soon enough, we could witness a massive resurgence for countless businesses. Restaurants have weathered the lockdown by offering takeout and delivery services, and some are starting to allow outdoor seating while adhering to social distancing guidelines. While the auto industry is in a massive slump due to travel restriction and lockdown orders, analysts predict that there will be a large increase in demand for new cars once travel restrictions lift due to pent-up demand and likely mistrust of public transportation due to Coronavirus concerns.
HOW DOES BANKRUPTCY WORK?
Bankruptcy is a court proceeding for individuals and businesses that cannot afford to pay their bills. When a company files for chapter 11 bankruptcy, a court-appointed trustee and a judge will carefully review all of their financial information. Bankruptcy can provide the company filing for it with the chance to restructure, reduce, or even completely discharge some debts.
The company applying for bankruptcy must provide the court with a complete and detailed list of their debts, income, assets, and operational expenses. The court needs this information to determine the company’s ability to pay its debts and to decide which type of debt relief would apply best to the company’s situation.
HOPE AND RISK IN THE FUTURE
COVID-19 has dramatically reshaped how the American people work and do business. Small businesses are some of the companies hit hardest by the economic fallout of the COVID-19 pandemic, and since they comprise more than 98% of the nation’s economy it is easy to see why so many analysts are worried about the future of the country’s economy as the pandemic lockdown situation continues to evolve. As many as 40% of American small businesses may close before October of this year, but there is also a chance that resurging companies could reinvigorate the economy in new, surprising ways.
Telecommunication and ecommerce are more viable than ever, and while some companies are managing financial disasters due to a lack of customers, other companies are thriving due to the products and services they provide and the ease of delivery today. Bankruptcy filings occurring today could eventually empower some companies to bounce back from the slump imposed by the lockdown restrictions.
Ultimately, the Coronavirus has had dramatic consequences for the world’s economy, and while US leaders consider more legislative measures to protect public health and American businesses, company leaders in all markets should carefully weigh their financial options and determine whether bankruptcy could be beneficial. If you have legal questions about your business options in the wake of COVID-19, call the Law Office of Christopher P. Walker at (714) 639-1990 or contact us online today to speak with an experienced bankruptcy attorney.