Bankruptcy guide for restaurants | modern restaurant management

In February 2020, the National Restaurant Association screenings announced that restaurant industry sales would reach $899 billion this year, growing 4% “reflecting general economic conditions”.
It seems like an eternity ago.

The COVID-19 pandemic has caused restaurant sales fall. In many states, incomes fell by 80% over the same period in 2019. New York City and other metropolitan areas were particularly hard hit. As business picked up in states that began easing restrictions, many restaurateurs were forced to close shop. Some have (or are considering) filing for bankruptcy.

Alternatives to bankruptcy

Struggling to pay debt does not automatically mean bankruptcy is inevitable. Restaurant owners have a few options that can be considered first.

The CARES Act offers several options that many restaurants have already chosen to take advantage of. Those who have not done so should consider how these programs can help them.

Most notable is the Paycheck Protection Program Loan. These are 100% federally guaranteed loans for businesses with fewer than 500 employees. If used for payroll costs, mortgage interest, rent, and utility costs, the loan may be eligible for forgiveness.

the CARES Act also offers tax relief for businesses, including deferred payment of employers’ social security contributions and increased interest deductions.

Beyond that, restaurateurs may be able to negotiate or restrict rental rates. The economy impacted by COVID means that vacant land can be vacant much longer than normal. This gives the restaurant owner the opportunity to negotiate with the owner.

In some cases, it may be worth recapitalizing the operation. This cash injection – with interest rates at record highs – may be enough to help some companies stay afloat until they return to profitability.

Types of bankruptcy

When a restaurant files for bankruptcy, the owner (or owners) must choose between filing under Chapter 7, Chapter 11 or Chapter 13.

Those filing under Chapter 7 cease all business operations. In this scenario, the goal is to liquidate assets to pay off as many creditors as possible. The bankruptcy court will decide who gets paid first and how much.

When filing under Chapter 11, all or most debt is suspended while the business attempts to reorganize. The goal is to return to profitability and pay all or most of the debts owed. This option is most often used for larger companies that can sell off valuable assets and restructure into a smaller, leaner and more profitable operation. A Chapter 11 bankruptcy plan must be submitted to the court and approved by a judge (more details below).

Chapter 13 allows restaurant owners to renegotiate payments with creditors. This is ideal for businesses that have held on to stable income, but not enough to pay off mounting debts. This would allow a restaurateur to retain its assets in hopes of weathering the COVID-19 crisis.

What happens when a restaurant files for bankruptcy?

The first thing a restaurant owner should do is hire a bankruptcy attorney. The second is to prepare for a long process.

The filing process officially begins with paperwork and a filing fee. There are 94 US bankruptcy court jurisdictions and documents must be filed in the appropriate one. After that, the company must file disclosures with the court – these can be lengthy and lengthy.

For Chapter 11 and 13 bankruptcies, reorganization and payment plans must be established and shared with the bankruptcy court. These plans should include how much each creditor will be paid and how long it will take to pay them.

Along with these forms, restaurants are often required to submit detailed information about business relationships, liabilities, and assets of the business. These requirements have been reduced or removed for filing as a “small business”. The debt cap for such a deposit has also been increased to $7.5 million, likely covering most individual restaurants in terms of debt.

Then, a confirmation hearing will take place to discuss the plan of reorganization with the creditors and the court. If the plan is rejected, a new plan must be drawn up based on the judge’s comments. If accepted, the company can move forward on the agreed terms.

Those who file for bankruptcy are generally required to submit progress updates to show that they are making payments and following through on bankruptcy plans.

What are the pros and cons of filing for bankruptcy?

Filing for bankruptcy is not a hasty decision. There are both pros and cons to doing so that a restorer should consider.

In terms of benefits, bankruptcy triggers a automatic stay. This prevents creditors from taking action against the entity, such as repossessing property, suing, or even sending threatening letters. In addition to the automatic stay, filing for bankruptcy can help fulfill obligations for certain types of debt.

Among the disadvantages is the risk of his property being seized to pay debts. There is also a limit to how often one can file under Chapter 7 (once every 8 years). Additionally, bankruptcy typically stays on the credit score for up to 10 years, which can make it difficult to secure future business loans or lease commercial property.

It’s important to remember that whatever the inconveniences, bankruptcy doesn’t have to be the end of a career. Although it takes time and discipline, people can recover from bankruptcy and continue to run successful businesses in the future.


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