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COVID-19: A Cardiac Event for Many Businesses

There are few companies that will emerge from the COVID-19 pandemic unscathed. Across the spectrum, from finance to travel to mom-and-pop shops, most businesses have experienced some level of damage, and more than a few will not be able to recover. Bankruptcy is on the horizon for many, if not already in progress.COVID-19: A Cardiac Event for Many Businesses

With shoppers opting to take greater advantage of online giants like Amazon, even long-standing franchises have had to file for bankruptcy. Traditional juggernauts from Neiman Marcus to JC Penney have filed, joining the ranks of many name brands that have needed to pursue bankruptcy since March. Even the once seemingly untouchable energy industry has been hit hard as more and more people had to stay home, with companies such as Chesapeake Energy being forced to file.

Impact of the Pandemic on Bankruptcy Filings

As of June 30, reported bankruptcy filings were actually lower compared to previous years – the  US Courts reported an 11.8 percent decrease in filings compared to that date last year. But filing activity may have been affected by disruptions to bankruptcy courts; the pandemic has caused the courts across the country to become jammed as courthouses closed down, moved to remote hearings, or just put cases on hold. In any case, there is the expectation of a “COVID-19 cliff,” according to Robert J. Keach, a director of the American College of Bankruptcy. Some anticipate that this year may set a record for filings by companies with $1 billion or more in debt, while others will challenge the record set the year after the 2008 economic crisis.

Right now, the ability to file bankruptcy is a critical tool that companies across the country need, and indeed there are law firms that are gearing up for the coming months as they anticipate more and more companies needing to file.

Of course, bankruptcy is not necessarily the end of a company. It can also be a way to give an organization new – or at least an extended – life. For instance, while a Chapter 7 bankruptcy involves liquidation, those filing for Chapter 11 have an opportunity to restructure and take care of the issues that may have been plaguing their business. It may take a while to recover, but during this time companies cannot be pursued by creditors, providing them with breathing room to make necessary changes or allow for a change of ownership while the business moves ahead. Many companies hit by the pandemic will likely pursue this option.

Government Response on Bankruptcy Filings

As companies continue to navigate the pandemic, the government has taken some measures to lessen the economic blow. There have been government amendments to the Small Business Reorganization Act of 2019 that were modified by The Coronavirus Aid, Relief and Economic Security Act, or the CARES Act.

These amendments outline efforts to provide more effective, efficient bankruptcy relief to a wider range of small businesses. First, as a result of a change to Subchapter 5, debtors now have 90 days to file a Chapter 11 plan once they file for bankruptcy. Additionally, the debt limit is increased in order for debtors to qualify for Subchapter 5, which “makes a bankruptcy reorganization a viable option for more small businesses.”

There are also changes to both Chapters 7 and 13 of the U.S. Bankruptcy Code that aim to provide relief. For instance, COVID-19-related payments from the government are not counted when it comes to assessing income level for eligibility. Further, these payments are not counted when calculating a debtor’s disposable income in regards to a Chapter 13 plan. Also, because of the amendments, Chapter 13 debtors are now permitted to alter existing plans based on financial hardship caused by COVID-19.

Handling Bankruptcy During the Pandemic: Be Prepared

For companies going through the bankruptcy process, being prepared is key. It is crucial to collect all of the necessary papers for filing to make the process less stressful and ensure it is legally compliant. Streamlining the filing process as much as possible also prevents adding to the backlog of cases now clogging the court system. Whether a company is closing out for good or using the bankruptcy process to hit the reset button for their organization, they need to be ready.

In many cases, there will be a need for eDiscovery-related services to sort through the mountains of paperwork that are necessary for filing or to prepare for the litigation that may accompany a bankruptcy proceeding. According to Christine Payne, partner at Redgrave LLP, in a recent news article, any discovery required in a bankruptcy will likely have to be executed under pressure as things move quickly, an increasing challenge as the data population becomes more and more complex.

For Chapter 7, there may be a need to recover information from departing employees who have access to certain data; once they leave, it could be gone for good (along with their passwords). For Chapter 11, where there is restructuring involved, there may be a need to collect C-suite communications. In all, eDiscovery for bankruptcy can be similar to other litigation, but it’s usually on a tighter timeline, so the ability to do things quickly is paramount. And under all circumstances there is the need to be mindful of sensitive information and PII.

No matter what, companies will need to be sure they can manage documents, field critical information, and meet key deadlines. By being prepared, companies or the law firms representing them can quickly have their ducks in a row and get the bankruptcy process started sooner rather than later, with fewer downside consequences. In the case of Chapter 11, especially, this can ultimately put them in a position to begin reorganizing their company at an earlier point without the specter of creditors looming.

Related articles:

In-House Legal: Adjusting to Pandemic-driven Changes
Ill Effects of COVID-19: Beyond the Health Toll  



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