Miami Herald

Small businesses in Florida could lose a financial lifeline

Florida small businesses at risk of bankruptcy might have an even harder time staying afloat if Congress doesn’t act by today.

Constructi­on firms, family-run restaurant­s and beauty salons across the Sunshine State are among the more than 1,000 struggling firms that could suffer without access to a federal initiative that makes it easier for them to file for bankruptcy, reorganize their businesses and avoid liquidatio­n.

More small businesses in Florida have benefited than in any other state.

Many large companies have the resources to go through the costly and time-consuming Chapter 11 restructur­ing processes, the traditiona­l way of declaring bankruptcy, and survive.

Ordinary small businesses face a much harder reality.

That’s where the bankruptcy alternativ­e called Subchapter V comes into play. The initiative was incorporat­ed into the country’s bankruptcy laws when Congress passed the Small Business Reorganiza­tion Act of 2019.. When it took affect in 2020, it gave eligible small businesses a faster, cheaper and more practical way to reorganize than the Chapter 11.

The initial debt, or liabilitie­s limit, for small businesses to be eligible was $2.7 million and later adjusted for inflation to $3 million. Then, in March 2020, coinciding with the start of the COVID-19 pandemic, that limit was increased to $7.5 million. In 2022, the $7.5 million threshold was extended, but it will return to $3 million today if Congress does not renew it.

Florida has had more businesses apply each year than any other state. Since the program’s debut through May 31 of this year, 1,067 Florida businesses have participat­ed, according to Ed Flynn, a consultant with the Virginia-based American Bankruptcy Institute.

The number of participat­ing firms in Florida has increased every year. It reached a record 264 last year, and this year is on pace to hit 444. South Florida accounts for almost a third of the cases.

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Nationally, there’s also a huge appetite for the less cumbersome restructur­ing. In 2023, the number of Subchapter V filings was nearly half of all Chapter 11 filings, according to research by Bob Lawless, who is a law professor at the University of Illinois and writes a blog called Credit Slips: A Discussion on Credit, Finance, and Bankruptcy.

Several bankruptcy experts praise the Subchapter V option, both for being more efficient and because they said they think the $7.5 million debt limit reaches more companies that need the help.

In Chapter 11, a trustee takes control of the business during the judicial process. For smaller firms that opt for Chapter 11

“it’s like having the carcass of an animal being picked clean by all the predators,” said Daniel Gielchinsk­y, a bankruptcy expert and a lawyer and partner with Aventuraba­sed DGIM Law.

With Subchapter V, the trustee talks to everyone, builds consensus and tries to make a deal, he said.

“A lot of jobs have been saved using Subchapter

V,” the attorney said.

If Congress doesn’t act by today, the program will survive but the debt limit for small-business owners will go back down to $3 million.

That would be unfortunat­e, says the American Bankruptcy Institute, which formed a task force that spent 12 months analyzing cases and seeking input from judges, bankruptcy trustees and academics.

In recommendi­ng the higher limit, the American Bankruptcy Institute found that over a quarter of firms were above the $3 million threshold and that they had a higher success rate in approval of their restructur­ing.

Soneet Kapila, a financial advisor in Fort Lauderdale specializi­ng in restructur­ing and the acting chairman of the American Bankruptcy Institute, is concerned.

“My biggest worry is you will lose an entire segment of businesses.”