In the past year, business owners have suffered the impacts of shutting down due to the pandemic. Even before the first case of COVID-19 made headlines, some businesses were feeling the squeeze from online competition. It would be fair to say, the pandemic-related closures and restrictions became the “icing on the cake” for any business, regardless of size, that needed a strong 2020 to remain competitive.
In Georgia, the state government opted to re-open businesses ahead of the national call to re-open. What has been the impact of this decision for local businesses? We reached out to two Best Lawyers recognized attorneys to discuss bankruptcy and the economic state of Georgia in early 2021.
Burr & Forman
Recognized for Bankruptcy and Creditor Debtor Rights / Insolvency and Reorganization Law since 2021
What is the current state of the Georgia economy?
The COVID-19 pandemic has damaged Georgia’s economy, but the state has fared much better than the rest of the nation. For example, Georgia’s peak-to-trough job loss was a few percentage points smaller than the nation as a whole. Likewise, 2021 economic forecasts call for Georgia’s inflation-adjusted GDP to grow faster than the national average. In large part, this is due to the Georgia economy reopening sooner than the rest of the country and the diversity of its economic base. A timely and efficient roll-out the COVID-19 vaccines will further strengthen the tailwinds, propelling the Georgia economic recovery.
Are there options for owners of small businesses before they file for bankruptcy?
The most immediate relief for small businesses is to take advantage of First-Draw or Second-Draw PPP loans under the CARES Act. The latest stimulus legislation is targeted to provide much needed relief to small businesses. Additionally, the Bankruptcy Code was amended in 2019 to add a new Subchapter V to streamline the bankruptcy process for small business debtors. The CARES Act has increased the maximum debt thresholds for small business debtors and it also extended the time to perform under commercial leases. Subchapter V has been a valuable tool for struggling small businesses during the pandemic.
What can businesses do preemptively to prevent declaring bankruptcy?
Businesses facing liquidity challenges should engage early with their lenders to explore possible loan restructurings, whether in the form of an amendment/waiver or a forbearance agreement. Lenders may be willing to grant payment deferrals, re-amortized monthly payments, and covenant waivers as short-term relief. Both lenders and borrowers have a mutual interest in the long-term success of the company. Lenders will need complete and accurate financial information and projections to assess loan restructuring alternatives. A company should engage a competent restructuring professional early in the process.
J. Robert Williamson
Scroggins & Williamson
Recognized for Litigation – Bankruptcy since 2011
Are there more people filing for bankruptcy in Georgia because of the pandemic?
There have certainly been people filing due to the effects of the pandemic. But according to statistics published by the American Bankruptcy Institute, overall filings in Georgia were down by 36 percent in 2020 versus 2019. We believe that is due primarily to several factors, such as CARES Act aid (direct payments, PPP loans, etc.), moratoriums on evictions and foreclosures, moratoriums on jury trials, and general delay in cases moving through the legal system. A lot of businesses and individuals are still experiencing substantial financial distress and as aid runs out and the legal system begins to return to normal so that evictions, foreclosures, and lawsuits progress, we expect to see a large uptick in filings later this year. Also, several businesses have just shut down and disappeared without seeking to reorganize under Chapter 11 or filing Chapter 7.
What are options for those who are unable to pay rent? What happens to landlords if that happens?
We have worked with both landlords and tenants and found that some, but not all, landlords have been willing to work with tenants to provide some relief. Usually this involves deferring, not forgiving, rent, with the deferred rent to be paid back in the future. Landlords, of course, have lenders and investors that they must satisfy, so rent defaults and deferrals have a real economic impact on them. Tenants who already had a good relationship with their landlord and a solid payment track record tend to have more success in negotiating deferrals and other concessions.
What kind of recourse is there before declaring bankruptcy? Is declaring bankruptcy the only option?
In addition to trying to negotiate an informal debt restructuring, there are other alternatives to bankruptcy. If workout negotiations fail and the client decides that it lacks the capital to continue to operate the business, it may be able to find a buyer if the business is otherwise sound. Additionally, sometimes the best course of action is to shut down the business and work with significant creditors and other constituents to maximizing the value of the assets as they are liquidated. This can be done in an assignment for benefit of creditors or sometimes through a “friendly” foreclosure under Article 9 of the UCC.