April 16, 2020

 

The economic impact of the coronavirus pandemic and measures to minimize its spread will likely require many small businesses to file for chapter 11 bankruptcy protection.  Fortunately for those businesses, the Small Business Reorganization Act of 2019 (SBRA), which took effect in February 2020, streamlines, simplifies, and aims to lower costs of reorganization for small-business debtors.

SBRA allows debtors with non-contingent liquidated debts—secured and unsecured—totaling not more than $2,725,625 to reorganize under a new subchapter V of chapter 11. The CARES Act, which Congress approved in March to address the impact of the coronavirus pandemic, temporarily increases the limit for filing under subchapter V to $7.5 million. The increase is to remain in effect until March 26, 2021.

SBRA affords a debtor several advantages compared to traditional chapter 11 reorganization.

  • Under subchapter V reorganization, only the debtor proposes a plan of reorganization, which is due 90 days after the order for relief. The elimination of competing plans reduces the debtor’s costs by obviating the need for contested hearings that drag out the reorganization process.
  • Under subchapter V, neither separate approval of the disclosure statement nor solicitation of votes of creditors is required to confirm the plan. Unlike in an ordinary chapter 11 filing, a debtor under subchapter V usually need not file a disclosure statement.
  • In a subchapter V reorganization, the court does not appoint a committee of unsecured creditors, except for cause. This significantly lowers the debtor’s costs, because committees of unsecured creditors are entitled to hire their own professionals, whose fees and costs the debtor is required to pay.  
  • Subchapter V allows the debtor to hire as bankruptcy counsel an attorney who holds a claim against the debtor of less than $10,000 that accrued before case commencement. This expands the pool of available attorneys for the debtor, potentially lowering costs for legal services.
  • SBRA removes the requirement that equity holders of a small-business debtor provide new value to retain their interest in the debtor without paying creditors in full. It instead allows small-business owners to retain ownership by allowing them to pay creditors over a longer period of time.
  • Certain individuals with business debts can also benefit from SBRA. The definition of debtor under subchapter V includes a person or entity engaged in commercial or business activity with aggregate secured and unsecured debts of $7.5 million. If at least 50% of an individual’s debts arose from pre-petition commercial or business activity, the individual can wrap his consumer-related debt into a subchapter V bankruptcy filing.
  • Under subchapter V, a debtor can modify the mortgage of the debtor’s principal residence, provided the mortgage loan was used primarily in connection with the debtor’s business rather than to acquire real property. Such modifications could include proposing a lower interest rate, extending the maturity of the loan, or cramming the loan down to the value of the secured claim.

The SBRA also includes provisions designed to ensure fairness for creditors. Under subchapter V, a standing trustee called a small business trustee is appointed to make sure the bankruptcy stays on track. The small business trustee has the ability to investigate the debtor’s financial affairs and to object to allowances of proof of claim. The small business trustee also acts as a conduit for plan payments.

In sum, by streamlining restructuring and significantly lowering its costs, The SBRA is likely to present an attractive option for many for small-business debtors whose businesses are in danger of failing due to the coronavirus crisis.

For more information on how these could impact your business, contact:

Professionals

Practice Areas

Jump to Page

By using this site, you agree to our updated Privacy Policy and our Terms of Use.