COVID Debt Relief – Bankruptcy and Weighing Your Options

February 16, 2022

At a glance

  • The main takeaway: In a panel discussion with Graham Stieglitz, Partner at Burr & Forman, we dispelled bankruptcy’s negative connotation and explored how it can be an outlet for businesses to relieve debt, reorganize or start anew.
  • Next steps: Evaluate your current situation and determine if bankruptcy is the best option for you — and if it is, make sure to choose the type of filing that fits where you stand today and where you want to go.
  • Alternative avenues: You may also choose to apply for a traditional loan from the SBA to help support your business needs while you resolve debt.

Schedule a consultation with an Aprio advisor for help navigating COVID-related debt.

The full story:

In a recent article inspired by our co-hosted webinar with Graham Stieglitz of Burr & Forman, we discussed the four initial solutions businesses can pursue to resolve pandemic debt. But in some cases, those preliminary steps may not be enough.

In Part II of this article series, we’ll be discussing more advanced debt relief options you can use to recapture financial viability and move forward with the next chapter of your professional life.

Four steps before filing for bankruptcy 

The dreaded “B” word carries a negative connotation in the business community — but it’s important to understand that bankruptcy doesn’t have to bring doom and gloom. Rather, bankruptcy can be the catalyst you need to start a transformative reorganization. Before you decide to file for bankruptcy as a solution to resolve debt, you should consider taking the following steps first:

Determine if your situation could improve: Is your current debt situation dictated solely by the pandemic, or are there other aspects of your business environment that could spark revitalization? Get down to the brass tacks of your financials, projections and the current and future dynamics of your market and industry.

Analyze your location and business unit: Evaluate the market in which you operate. What type of area is your business located in? Are you in the center of a city or suburb in which there is a broad community of patrons? Or are you located in the middle of a college campus where the crowd is more seasonal and less consistent? These factors all play a role in your future viability and ability to bounce back.

Review your personal guarantees: Like many owners, you may have signed personal guarantees in the growth stage of your business to help fund essential expenses. Review your personal guarantees and determine whether you can use them as leverage to expand your loan terms and reduce loan payments. If you have fewer personal guarantees, you may have a better chance of decreasing your loan limits, thus allowing you to recapture viability.

Evaluate the impact of a successful renegotiation: A renegotiation only makes sense for your business if you have a very clear understanding of what you want and why, in terms of your business’s future. It’s common for many owners to get knee-deep into a lease renegotiation, for instance, only to find out they won’t be better off once they have run the numbers and projections. A successful or attempted renegotiation can give you valuable insight into what your next steps should be from a bankruptcy perspective.

Types of bankruptcy

If you do decide to file for bankruptcy, there are three different avenues you can pursue, based on what you uncovered in the discovery steps we discussed above:

  • Chapter 7: This type of bankruptcy allows you to throw in the towel, walk away from your business and start over debt-free. This is the hard, but sometimes necessary decision owners must make if their debt situation is dire and if future projections are not promising.
  • Chapter 11: This type of bankruptcy allows you to reorganize your business, instead of walking away and starting from square one. When you file for Chapter 11 bankruptcy, you’ll have the opportunity to go on the offensive and perfect your negotiation strategy to reduce debts and transform the future of your organization.
  • Subchapter 5: Also known as the Small Business Reorganization Act, Subchapter 5 bankruptcy allows owners to keep their equity through the renegotiation process. This option is available to businesses with $7.5 million or less in total debt and provides businesses with a three- to five-year plan to pay disposable income. Note that Paycheck Protection Program (PPP) loan debt and remaining lease payments do not qualify (although past due payments do qualify).

Potential alternative: SBA loans

You may remember that the Economic Injury Disaster Loan (EIDL) was the first lifeline available to businesses at the beginning of the COVID-19 pandemic in March 2020.

As of January 1, 2022, the U.S. Small Business Administration (SBA) is not accepting applications for new EIDLs or advances, but it will accept and review reconsideration and appeal requests for EIDL applications received on or before December 31 — so long as the SBA received the reconsideration or appeal within the timeframes in the regulation. Those time frames are six months from the date of decline for reconsiderations and 30 days from the date of reconsideration decline for appeals unless funding is no longer available.[1]

According to the SBA, you may also request increases up to the maximum loan amount you’re eligible for up to two years after your loan origination date or until the EIDL funds are exhausted — whichever comes first.

If you aren’t able to take advantage of the EIDL given the information above, you also have the option of applying for a traditional SBA loan to support your business. You can learn more about that application process on the SBA’s website here.

A final thought: Debt limit extension

There is one more important factor to keep in mind. Last March, the COVID-19 Bankruptcy Relief Extension Act was signed into law, temporarily extending several provisions of the Coronavirus Aid, Relief and Economic Security (CARES) Act. As you may recall, the CARES Act increased the debt limit for eligible businesses from $2.7 million to $7.5 million.

With the signing of the COVID-19 Bankruptcy Relief Extension Act, that $7.5 million limit was extended through March 27, 2022. Be sure to take advantage of this provision while you still can, because if the Act is not extended further, the debit limit will return to $2.7 million.

The bottom line 

Do you need help navigating debt relief options as you steer your business through the COVID-19 pandemic? Aprio’s Retail, Franchise and Hospitality team can provide valuable third-party perspective and help you determine what avenue would create the most favorable long-term outcomes for your business.

Schedule a consultation with us today.

Related resources

[1] U.S. Small Business Administration, COVID-19 EIDL description on the SBA website, updated January 2022,, accessed February 2022.

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About the Author

Jessica Hussain

Jessica is a Partner in Retail, Franchise & Hospitality for Aprio. She has 15 years of experience in public accounting and works with clients in the real estate and retail, franchising and hospitality industries. In her role as senior manager, Jessica manages a team of five professionals, supervising their day-to-day activities, assigning work and reviewing all tax returns.