Owning a restaurant is like being the captain of a ship. You have to worry not only about the state of the ship itself, but also about the seas. Over the past two years, the COVID-19 pandemic has been responsible for the most unpredictable seas in decades. Between full closures, partial openings, returns to full closures, and then literally who knows what, many restaurateurs have put their boat in the rocks and many more will follow in the weeks and months to come.
While the goal should always be to support restaurants in our home communities to the best of our abilities – especially small family food businesses – even with our best efforts, sometimes the burden of keeping the restaurant open is just too much. heavy. Nearly 100,000 restaurants have closed in the United States since the start of the pandemic, or 15% of all restaurants – a number that has shaken the entire industry.
So what happens when a restaurant closes? Michele Finizio, a New Jersey attorney, explains the options a restaurant has if it chooses to file for bankruptcy. “Assuming the restaurant is actually operating legally, the owners could choose to file for bankruptcy. If they do, they have three options: Chapter 7, Chapter 11, or Chapter 13 bankruptcy. Each comes with certain advantages for the party filing.
In Chapter 7 bankruptcy, the restaurant would close and the bankruptcy court in the relevant jurisdiction (there are nearly 100 bankruptcy jurisdictions in the United States) determines which of the creditors gets what. There is never enough for everyone, so the court’s job is basically to prioritize assets and creditors. The first paid are sometimes the only ones paid and generally not in full.
The second option is called Chapter 11 bankruptcy. It is a type of bankruptcy that is favored by restaurants where they see a path to success on the horizon but need a break to reorganize the business. The business is allowed to continue, the debts are reorganized and sometimes consolidated into a plan which is submitted to the court. The restaurant is allowed to continue to exist as long as the court accepts their plan, even if it does not result in the repayment of all debts. Usually, the restaurant has to sell some assets to be able to pay off its debts. So Chapter 11 may not be ideal for a family food business.
Finally, for a Chapter 13 bankruptcy, the restaurant works with its creditors to renegotiate payments. This is the path taken by many restaurants since the pandemic. This is ideal for a food business that was profitable before the pandemic, has had some very difficult times since mid-2020 (perhaps with some pauses and a return to more normal activity) but now sees a path to back to the way things used to be.
Whichever legal route a restaurant chooses to take, the biggest problem for all of us is that the vast majority of restaurants that close simply won’t be able to reopen. This hurts the economy as a whole, but affects our local communities more deeply. Small food businesses not only support the families who own them – seen collectively, but they are also an important group of employers across the country.
Aron Solomon, JD, is Chief Strategy Officer for Esquire Digital and Editor-in-Chief of Today’s Esquire. This column was provided by InsideSources.