Tighter Lending Restrictions Leading to Chapter 11 Bankruptcy in Michigan

Did you know that interest rates move in lockstep with the Fed’s rates? The Fed’s key borrowing rate acts as a benchmark for other loans. So when their rates increase, so do yours.

In the past year, existing rates have led to tighter lending restrictions for nearly everyone seeking a loan. For instance, the Fed rates were holding near-steady during and right after COVID in 2021. But the Fed hasn’t lowered interest rates, and that means loans for financing big-ticket items continue to be costly for some businesses.    

Businesses attempting to stay afloat have been hit especially hard. As a result, Chapter 11 bankruptcy in Michigan has become far more commonplace. And with the Fed expected to raise borrowing costs again later this year to combat inflation, the trend may likely continue.

How Tighter Lending Restrictions Impact Businesses

Banks and other institutions that have tightened their lending restrictions typically require higher credit scores, larger down payments, and stricter collateral from borrowers who are trying to save their businesses. This lack of access to credit can create an operational chokehold.

Accounts receivable required for running daily operations slow down or stop altogether. Lack of cash means delayed payments to the suppliers and vendors. And if the business is also unable to refinance its existing debt under these new requirements, it can create a massive debt obligation.

Eventually, the only foreseeable way for a business to avoid forced liquidation and insolvency is to file for Chapter 11 bankruptcy.

Increases in Chapter 11 Bankruptcy Filings in Michigan

Any-sized business can be negatively impacted by tighter lending restrictions and requirements. And none are immune to having to file for Chapter 11 bankruptcy. Small businesses, however, face a bigger risk with these new restrictions.

A small business is typically defined as a company with fewer than 500 employees. In reality, most employ fewer than 20. And despite the looming presence of large corporations, small businesses account for half of all private-sector workers and 44% of private-sector output.

While small businesses don’t borrow massive sums of money, when calculated as a whole, it adds up. Around 70% of small businesses have at least some outstanding debt. And for those who have taken out variable-rate loans, the financial fall-out can be devastating.

Small businesses generally rely on bank loans for over 90% of their financing. They help cover basic operating expenses like wages, rent, investing in new equipment, and inventory. Second only to individual savings, getting a commercial loan from a bank is the most common source of capital. So as bank lending becomes increasingly restricted, businesses are forced to cut spending or seek alternative sources of more expensive capital to continue to invest and expand.

It’s no wonder that so many companies in Michigan have had to file for business bankruptcy in the past year. Fortunately, it can be a viable option. Especially when choosing an experienced business bankruptcy lawyer.

How Commercial Bankruptcy Helps Businesses Recover

A Chapter 11 bankruptcy can be a godsend for commercial business owners who wish to continue operating while concurrently repaying creditors.

How does it work?

When the owner chooses to file for bankruptcy, they typically have the right to file a plan of reorganization for the first 120 days after they file the case. This plan must include a disclosure statement to the creditors that contains adequate information to enable them to evaluate the plan. The plan is sent to a court which either approves or disapproves the plan for reorganization.

A plan that is approved is called a confirmed plan. In this case, the business owner can reduce their debts by repaying a portion of their obligations and discharging others. They also have the option to terminate costly contracts and leases, recover assets, and restructure their operations for profitability. There usually follows a period of consolidation after which the business owner emerges with a reduced debt load and a reorganized business.

A plan that is not approved opens the door for creditors or a trustee to propose an alternative plan. The court generally sets a deadline for the business owner to either amend the plan or propose a new one. They may also face a motion to convert the case to a Chapter 7 liquidation.

This is why it’s crucial that any business owner facing a commercial bankruptcy work with only the most skilled Chapter 11 bankruptcy lawyers.

Could Chapter 11 Bankruptcy Be a Solution for You?

If tighter lending restrictions are forcing you to consider a Chapter 11 bankruptcy in Michigan, you are not alone. The expert lawyers at Gold, Lange, Majoros, and Smalarz are here to help.

As highly skilled bankruptcy attorneys, we know all the complexities of business bankruptcies. We’ll work hard to ensure your debt obligations are discharged so they can’t complicate your financial restart.

So don’t settle for less. Contact us today.