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 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, back to full closures, then literally who knows what, many restaurant owners have run their ship into the rocks and many more will follow over the next weeks and months.
While the goal should always be to support restaurants in our home communities to the best of our ability – especially mom and pop small food businesses – even with our best efforts, sometimes the burden of keeping the restaurant open is just too much. Close to 100,000 restaurants have closed in the United States since the pandemic began, which is 15 percent of all restaurants – a number that has sent the entire industry reeling.
So, what happens when a restaurant closes its doors? Michele Finizio, a New Jersey lawyer, explains the options a restaurant has if they choose to file for bankruptcy. “Assuming the restaurant is actually operating legally, the owners could choose to declare 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 close to 100 bankruptcy jurisdictions in the United States) determines which of the creditors gets what. There is never enough to go around, so the court’s job is to essentially prioritize assets and creditors. The first ones paid are sometimes the only ones paid and usually not in full.
The second option is called Chapter 11 bankruptcy. That is a type of bankruptcy that is favored by restaurants where they see a path to success on the horizon but need breathing room to reorganize the business. The business is allowed to continue, debts are reorganized and sometimes consolidated in a plan that is submitted to the court. The restaurant is allowed to continue to exist as long as the court accepts their plan, even if it doesn’t result in all of the debts being paid off. Usually, the restaurant has to sell off some assets to be able to pay back debts, so Chapter 11 may not be ideal for a mom-and-pop food business.
Finally, for a Chapter 13 bankruptcy, the restaurant works with its creditors to renegotiate payments. This is the path a good number of restaurants have taken since the pandemic. It is ideal for a food business that was profitable before the pandemic, has experienced really hard times since mid-2020 (perhaps with a few breaks and a return to a more normal business) but now sees a path back to the way things once were.
No matter the legal path a restaurant chooses to take, the larger issue for all of us is that the vast majority of the restaurants that close simply won’t be in a position to re-open. This hurts the economy writ large but most profoundly affects our local communities. Small food businesses not only support the families that own them – seen collectively, but they are also an important group of employers throughout the nation.
