Take action now before declaring bankruptcy

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Federal stimulus funds used to support struggling businesses during the COVID-19 pandemic have so far delayed bankruptcy filings – but it could be coming to an end.

As federal dollars and commercial loans start to dry up, bankruptcies are expected to increase from the first quarter of 2022 after falling well below average this year, especially among those in the auto, l hospitality and health care.

This should come as no surprise as our nascent recovery is still in its early stages. The global chip shortage that is slowing the manufacturing of automobiles, computers, medical equipment and other electronics is expected to continue at least until mid-2022.


Banks are expected to start cracking down on bad loans in the first quarter of the new year. Either way, already struggling businesses will be hit even harder, with many finding themselves in the hot seat with lenders over cash flow issues.

Three steps before filing

For many of these companies, bankruptcy is not a question of “if” but “when”. The good news, however, is that there are things organizations can do now to better position themselves to emerge from a bankruptcy restructuring. The sooner a business begins to right the ship, the faster it can emerge from financial distress.

For some businesses that find themselves facing bankruptcy, a forbearance agreement with the lender makes perfect sense. Under this agreement, the company has time to resolve its financial issues and return to a payment schedule acceptable to the bank.

Before approaching a lender about forbearance, businesses should consider three steps to prepare for filing for bankruptcy. These include:

  • Pay the large bills, such as taxes, pension contributions, and other obligations to key suppliers that you will need in bankruptcy. Stay up to date on federal and state taxes to avoid personal liability for non-payment.
  • Work with your accountant to make sure your financial data is accurate. Accurate financial information, including projections, is essential to any bankruptcy or turnaround transaction.
  • Hire experienced professionals. Consider retaining the services of a financial advisor who can help you develop a plan and write projections that accurately reflect your organization’s financial situation and rebuild the relationship with your lender. Work with an attorney who focuses on bankruptcy and restructuring to ensure the financial plan meets legal requirements and prepares your business for future success.

Throughout the pandemic, we have been reminded of the fact that we live in a globalized world. We’ve seen first-hand how the challenges of a company making a certain part or product can plunge the entire supply chain into chaos. This reality has surfaced in raw material shortages, supply chain grumbles, traffic jams at our ports and other issues.

With the right plan and the right professional help, struggling businesses can get through this tough time, come out stronger on the other side by using bankruptcy protections to restructure debt and position a business for continued success.

Rozanne M. Giunta is a partner at the law firm Warner Norcross + Judd LLP which focuses its practice in bankruptcy and restructuring. She can be reached at rgiunta@wnj.com.

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