All the forecasts point in the same direction: A wave of small-business bankruptcies is coming.

More than 40% of the nation’s 30 million small businesses could close permanently in the next six months because of the coronavirus pandemic, according to a poll by the U.S. Chamber of Commerce.

“It’s a crisis that will impact our economy for generations,” said Amanda Ballantyne, executive director of Main Street Alliance, an advocacy group for small business. “We’re going to lose so much of the small-business sector.”

Commercial bankruptcies in the first quarter of 2020 ticked up 4% from a year earlier, according to data from the American Bankruptcy Institute. But many of those filings were made before the pandemic, when the economy was healthy. Right now, some owners are waiting to find out if they will receive federal stimulus aid before deciding whether to file for bankruptcy protection.

Many of them may just disappear. But for others, a bankruptcy law that took effect in February, the Small Business Restructuring Act, could help them survive the pandemic.

Before that law, if a struggling small business wanted to restructure its debt, its only option was Chapter 11, which is the commercial bankruptcy code. It allows a company to negotiate with creditors for better terms — a process known as debt restructuring — and in some cases dismiss debt. The goal is for the company to get a fresh start.

But the Chapter 11 process is long and expensive, and a recent report by the Brookings Institution found that it is better suited to large firms. The new rules, known as Subchapter 5 because they are part of Chapter 11, give firms with less than $2.73 million in debt the power of reorganization with a few key simplifications. Two main changes: A judge can enforce a restructuring plan even if creditors don’t like it, and the owner can continue running the business.

Congress recognized that this tool could be a lifeline to small businesses trying to get through an economic shutdown. So as part of the federal stimulus program, it expanded eligibility to firms with up to $7.5 million in debt. That change means Subchapter 5 could help up to 70% of all businesses that might file for bankruptcy, Brookings estimated.

“A number of small businesses who are prone to just giving up could be saved,” said Bob Keach, who leads the bankruptcy practice at Bernstein, Shur, Sawyer & Nelson, a law firm in Maine.

A to Z Total Heating and Cooling in suburban Detroit was one of the first companies in the country to file for bankruptcy protection under the new rules. The family-owned firm has been operating for nearly four decades, but business really took off in the past few years. The company struggled to manage the growth.

Its primary problem? Labor. The company’s two dozen employees weren’t enough to keep up with demand, and Jerry Stetina, A to Z’s chief operating officer, said it couldn’t find additional workers. That meant the firm got bogged down paying overtime on top of the typical $35 hourly wage — and tapped out cash reserves.

“I know it sounds really crazy, but the process of growing put us in the situation we’re in,” he said.

Then a mild winter hit Michigan this year, and fewer customers called for new furnaces or repairs. What little work the employees did have was shut down by the coronavirus. But they didn’t want to give up: Stetina could see a strong summer season; A to Z just needed a bridge to get there.

“People will live without heat, but they won’t live without air conditioning,” he said. “Our phones are ringing now with questions about AC startups to get ready for summer.” When A to Z exits bankruptcy, the company plans to hire a controller to better handle its finances.

Here are some of the main questions to consider if you are thinking about a bankruptcy filing for your small business.

How do I know when to call it quits?

Business owners must search their hearts and assess their balance sheets.

“The first question to ask is, ‘Do the owners want to keep this going?’” said Kimberly Ross Clayson, whose firm, Clayson, Schneider & Miller in Detroit, advises small-business clients.

If your heart isn’t in it, call a lawyer to help you wind down operations. But if you still think your business can become viable, a Chapter 11 bankruptcy might be the right call.

Initially, Stetina of A to Z was scared to call a lawyer. He knew the stigma around bankruptcy and was worried what clients might think, even though A to Z planned to restructure, not discharge, debt. Once he did call, he said, he wished he had done it earlier.

“A lot of big businesses have been doing it for years, and it’s some of the reason that they are in business still,” Stetina said.

How do I know if restructuring would help?

Write a business plan for a post-pandemic business world. How will your business operate? Where will revenue come from? What new expenses — for marketing, infrastructure and more — will you incur to help your business pivot? If you can write a business plan that shows a positive balance sheet after bankruptcy, restructuring might work.

“Chapter 11 bankruptcy is designed to fix people’s balance sheets,” Keach, the Maine lawyer, said. “It allows you to restructure some debt, eliminate other debt. It doesn’t generate revenue for you.”

Should I take out a loan or file for bankruptcy?

Every business owner’s situation is different. But a general rule is, if you can’t identify enough future revenue to pay off the debt, borrowing may make matters worse. Some business owners no longer have any personal resources to draw on and may not receive federal stimulus funding.

“Don’t borrow blindly and say, ‘It will all work out,’” said Clayson, who is a federal trustee for Subchapter 5 claims. “If you are thinking a credit card is how you will open your doors and bridge yourself to the next stage, then you really need to be thinking about how viable your business is.”

If you find yourself considering nonbank lenders with high interest rates, it’s time to call a lawyer, she said.

Do I have to file for bankruptcy to close my business?

No. If you can pay off your creditors or negotiate a deal with them, you don’t need to file for bankruptcy protection. But you will want a lawyer to draft agreements.

Also, don’t forget about withholding taxes. When times are tight, many small-business owners who manage their own payroll dip into that pot of money they set aside at each pay period and use it for other expenses.

“If you have unpaid withholding taxes, the business owner becomes personally liable,” Clayson said.

Should I file for Chapter 7 or Chapter 11?

Think of Chapter 7 as a funeral and Chapter 11 as a do-over.

Chapter 7 is used for both individual and business bankruptcies when the goal is to wipe out debt. The debt can go away, but you may also lose your assets.

If you wanted to restructure your business debt, you would consider a Chapter 11 bankruptcy and, more specifically, Subchapter 5 for small businesses. But you can always try to negotiate with creditors outside of a formal bankruptcy.

“The only reason you need to use Chapter 11 at all is to deal with recalcitrant creditors,” Keach said. “If creditors won’t negotiate with you, bankruptcy allows you to cram down a plan of restructuring.”

There are other forms of bankruptcy filing: One, Chapter 13, is used for personal reorganizations, when you want to try to keep your assets and renegotiate the terms of your debt. Another, Chapter 12, oversees businesses in farming and fishing.

Will I lose everything in bankruptcy?

It depends on what personal guarantees you made. Most small-business owners put up their home or some other asset as collateral for startup loans. In fact, the Small Business Administration requires that as part of its non-COVID-related lending.

If you used your house as collateral, it’s possible you would be forced to sell it as part of a Chapter 7 settlement. Under Chapter 11, you may have more luck.

Must I file both personal bankruptcy and business bankruptcy?

Possibly, but not necessarily. It depends on whether you are closing the business or trying to restructure and what liabilities you have.

If you are trying to restructure, the goal is for your lawyer to negotiate with your creditors and create a plan that lets you avoid a personal bankruptcy. But if the creditors don’t like the deal, they could come after you for any debts you personally guaranteed. In that case, you might be forced to file for personal bankruptcy.

How does the new Subchapter 5 work?

Here is the main thing to know: Like all bankruptcies, it has a magic power called the “automatic stay.” Filing for bankruptcy stops creditors from collecting from you.

“It buys you time,” Keach said.

And time is everything. For example, take a restaurant that was having its best year before the pandemic, but then its revenue disappeared. A Subchapter 5 bankruptcy could help the company by halting creditor collections and allowing owners to renegotiate terms.

“What it might allow is, with a couple of exceptions, a built-in moratorium on rent,” Keach said. “You could propose a plan where you could literally not pay anything toward old debt for four to six months as long as your projections show that you have positive projected income after that.”

In exchange, business owners will need to use their net operating income — what’s left after the usual expenses like rent, payroll, cost of goods — to pay creditors for the next three to five years.

Can I ever open another business?

Yes. Securing funding may be more challenging, but it’s not impossible.

“My favorite clients have always been those who are already on to their next idea,” Clayson said. “This is the American way. You can start over. This isn’t a black mark.”

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