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Why filing for bankruptcy could be the best strategy for Philly restaurants

Going bankrupt isn’t admitting defeat. It’s a strategy to succeed. It gives the restaurant owner an important weapon: time.

A masked pedestrian walks past heaters and an outdoor dining setup by 16th and Sansom Streets in Philadelphia. Restaurants are no longer allowed to host indoor dining due to the latest coronavirus restrictions as cases in the region surge.
A masked pedestrian walks past heaters and an outdoor dining setup by 16th and Sansom Streets in Philadelphia. Restaurants are no longer allowed to host indoor dining due to the latest coronavirus restrictions as cases in the region surge.Read moreHEATHER KHALIFA / Staff Photographer

Take a walk around Center City Philadelphia and you’ll see many empty and shuttered restaurants. That’s no surprise. Running a restaurant when you cannot have customers inside and when the temperature is 35 degrees outside is not a recipe for long-term survival. Unfortunately for these restaurant owners, the short-term outlook is bleak. City restrictions will be in place until the end of the year and — given the rise in cases and hospitalizations — will likely continue in some form well into 2021. Even if these restrictions are eased, it will still be very hard for restaurant owners to make ends meet.

“We shouldn’t be in this place,” Nicole Marquis, who owns three establishments in the city, told The Inquirer. “It’s utter chaos, and we’re now headed into the worst wave of business closures. We used all of our resources through summer.”

So what to do? I know what. File for bankruptcy.

Don’t laugh. It’s a viable option and one that many local restaurant owners should seriously consider. Why? Because “it’s a strategic financial option,” according to Michael Cibik, a Bankruptcy Board-certified attorney based in Philadelphia.

In the past, filing for reorganization under the Chapter 11 bankruptcy code was an expensive, complex affair, especially for small firms. But just this year, that’s all changed. That’s because of the new Small Business Reorganization Act. The new law puts control solely in the hands of the small-business owner, and it significantly reduces paperwork, fees, and the time frame for filing and then emerging from a bankruptcy reorganization. It provides more asset protections, particularly around personal assets (as long as they weren’t previously pledged). And any small business with less than $7.5 million in outstanding debts (an amount temporarily increased from $2,725,625 thanks to the CARES Act from March) is eligible.

Here’s how it works.

Once an attorney is hired and a formal bankruptcy declaration has been made, a trustee is assigned and the clock starts running. A business has up to 90 days to come up with a plan. Under the law, all debts owed must be paid back in three to five years, and — very important — if an agreement isn’t reached with a creditor, a preestablished payback formula that includes the owner’s disposable income will prevail. Compared with the past, the paperwork, disclosure statements, and filing requirements have been significantly eased, which means lower legal fees for the business (although Cibik says legal fees can still be as much as $15,000 to $20,000).

In the meantime, the business continues to operate as normal. Most personal assets aren’t in jeopardy, and even some debts — like a second mortgage used for purposes of paying for a business — can be included in the negotiations.

Still, many restaurant owners I know may hesitate to take such drastic action. They’re concerned about what the news of a bankruptcy would do to their restaurant’s reputation, credit scores, and relationships with their suppliers. Is this a very big issue? Not according to Cibik. “Sure,” he says. “Once they file, it’ll make the news the first day or two. But then they’re still open and serving.”

Credit scores will be impacted. But we’re in an unprecedented recession. What future lender won’t be impressed by the management skills of a restaurant owner who was able to navigate through these extraordinary economic times? As for suppliers, “they’ll threaten to cut restaurants off,” Cibik says. “But most likely they’ll put you on COD [cash on delivery] terms and keep doing business with you.”

Some suppliers may be angry, but relationships can be repaired, particularly if by filing for Chapter 11, a restaurant can avoid going out of business altogether. “It’s not going to hurt your brand,” Cibik says. “You’re in possession of the restaurant, you’re operating. That’s the really big benefit.”

One restaurant owner recently told me that bankruptcy is only the right move if you’re “tired or done with what you are doing.” I don’t agree.

Going bankrupt isn’t admitting defeat. It’s a strategy to succeed. It gives the restaurant owner an important weapon: time. Vaccines are rolling out shortly, and tens of millions of people are expected to be vaccinated by the summer. Many economists predict that the economy will begin a stronger recovery by mid-2021. So we’re talking about taking whatever steps necessary to survive until then. And once things turn around — and they will turn around — I believe restaurants choosing this strategy will be positioned for greater success going forward.

Will customers come back even if a restaurant filed Chapter 11? I know I would.

Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.