As the pandemic intensified, even companies with enough cash to try to reorganize in court lost faith that they’d be able to stay open after cutting their debts, Bloomberg News reported. On March 28, Carol and Henry Huffman of Pike Creek, Delaware, simply closed down their specialty catering shop, the Cheese Chalet, and walked away rather than seek court protection from creditors and chance a reopening. “Waiting was not an option,” Carol Huffman said. “They kept saying there might be another shutdown in the fall.” Hundreds of thousands of small business owners made the same decision in 2020, according to researchers. Collectively, they laid off millions of employees and walked away from small stores, restaurants and other enterprises in a wave of silent closures. Next year may be different if the widespread rollout of a vaccine gives entrepreneurs hope that cutting debt under court oversight is once again worth it. “Bankruptcy requires people to be hopeful that there will be a better future on the other side,” said Prof. Jared Ellias of the University of California's Hastings College of the Law. “I suspect you will see a serious bounce in Q1 and Q2 especially. The driver isn’t going to be the pandemic. The driver is going to be the vaccine.” A spate of shutterings would typically cause bankruptcies to surge, according to a paper by academics at the University of Illinois, Brigham Young University and Harvard Business School. But in 2020 they declined as some business owners walked away while others received enough government support to delay reorganizations. Through November, 20 percent fewer business cases were filed compared to the same period last year, according to statistics from the American Bankruptcy Institute. A new provision of the bankruptcy code, known as Subchapter V, started this year and was designed to make the process cheaper and easier for companies with less than $7.5 million in debt. So far, about 1,300 such cases have been filed, said Ed Flynn, a consultant with ABI who studies bankruptcy statistics. Some small companies want to wait before filing for bankruptcy under Subchapter V rules because the process comes with tight deadlines for proposing a debt-cutting plan, said Matthew C. Zirzow, a bankruptcy lawyer in Las Vegas who led two companies through the process in Nevada and has many more clients waiting to file. “They don’t want to file Subchapter V too soon,” he said in an email. “It may have a great business when things bounce back that is well worth eventually reorganizing, but who is to say when that will happen?” Banks and landlords have been far more willing to work with struggling firms during the pandemic, keeping some out of bankruptcy for longer, Ellias said. “The normal mechanisms of debt collection are not working because banks are holding off on collecting,” he said.
