Guest Commentary By Michael D. Fielding Husch Blackwell

 Bankruptcy May Be Good for You

Lenders generally view a commercial borrower’s

bankruptcy as a bad thing.

It results in delayed payments, potential loan cram down and potential clawback actions. Tere also is the overarching administrative headache of simply dealing with the bankruptcy proceeding. Clearly, banks would like to avoid these altogether. But sometimes no matter how hard we try, the bankruptcy is inevitable, and the lender must deal with it.

Unfortunately, some of those inevitable bankruptcies are about to hit many lenders — particularly those who focus on small business loans. In February 2020, the Small Business Reorganization Act added a new Subchapter V to Chapter 11 of the Bankruptcy Code. Te purpose of this amendment was to make it easier and cheaper for small businesses to seek Chapter 11 bankruptcy protection. SBRA’s original debt


eligibility limit was $2.7 million. But the Coronavirus Aid, Relief and Economic Security Act increased that debt limit to $7.5 million. Critically, however, that increased debt limit expires March 27, 2021. As that deadline draws closer, it is expected that many eligible small businesses with total debts less than $7.5 million will seek the very debtor- friendly provisions afforded by SBRA. Indeed, we saw this same thing happen in 2005 when debtor-friendly bankruptcy provisions were replaced with more creditor- friendly provisions.

Given this coming wave of small business bankruptcy filings, what can lenders do to turn a bad event into a positive result? To begin, we need to recognize that there is a tendency to fight and oppose borrowers’ bankruptcies at each step of the way. Tis legal contention is oſten counterproductive because it delays the bankruptcy

proceeding and can significantly increase the legal costs associated with it. Perhaps a better way to view a borrower’s bankruptcy filing is to think of it along the lines of a political compromise — you concede one key item that you really don’t like but is hugely important to your opponent and in return you get several other things that are very beneficial to you.

Given this coming wave of small business bankruptcy filings, what can lenders do to turn a bad event into a positive result?

Under SBRA, the borrower/ debtor is required to devote their disposable income for three to five years to the payment of general unsecured creditors. If they

meet this commitment, they get their discharge and retain their property. Disposable income is the money that is leſt over aſter the debtor deducts the payment of expenditures that are necessary for the continuation of the business. If you are a secured creditor whose borrower has racked up too much unsecured debt, a SBRA filing could be really good because the borrower can continue to make payments on the secured debt while simultaneously shed significant unsecured debt.

So when your borrower signals that bankruptcy is likely inevitable, how should a lender respond? First, remember that the goal is to minimize the time and expense in bankruptcy while getting a result that is overall beneficial to the lender. Te most effective way to do this is by negotiating key bankruptcy provisions with your borrower before they file for bankruptcy.

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