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Small Business Reorganization Act of 2019 Expanded by CARES Act

April 8, 2020

The Small Business Reorganization Act of 2019 (“SBRA”) was signed into law by President Trump on August 23, 2019 and went into effect on February 19, 2020. Prior to the enactment of this Act, small companies found Chapter 11 proceedings challenging, impractical and costly.

In creating Subchapter V of Chapter 11 of the Bankruptcy Code, Congress intended the SBRA to help simplify and hasten small businesses’ bankruptcy reorganization, as well as lessen the expense of a small business bankruptcy. Presently, the eligibility for a small business to file under the new SBRA subchapter is limited to those debtors with total debts of $2,725,625 or less.  

Additional key elements of a Chapter 11, Subchapter V bankruptcy include:

  1. “New Value” Rule is Inapplicable: Under the new subchapter, creditors do not have to be paid prior to shareholders retaining their ownership interest; equity interest holders do not have to provide new value to retain their ownership interest in the reorganized debtor. Small business owners are able to retain their interests in the business; a Subchapter V debtor may retain an equity interest in the reorganized debtor as well.
  2. Confirming Plan of Reorganization: An impaired class is not required to vote in favor of a plan of reorganization; the plan need only be “fair and equitable”. The court will confirm a plan of reorganization that provides that the debtor’s disposable income received will be applied to make payments under the plan for a period of 3 to 5 years.
  3. Fees: Subchapter V debtors are excluded from the United States Trustees fees proviso.
  4. Creditors’ Committee: In a Subchapter V case, there is no creditors’ committee as the appointed trustee (see below, Paragraph 5) will perform the duties of the committee. Further, unless a court otherwise directs, Sections 1102(a)((1), (2) and (4),  1102(b),  and 1103 (establishing unsecured creditors’ committees in Chapter 11), do not apply to a small business bankruptcy under the SBRA (Section 1181).
  5. Trustee Appointment: A case trustee is appointed to supervise the debtor’s progression during the bankruptcy case. The Office of the U.S. Trustee, an office of the DOJ, selected 250 candidates to act as fiduciaries for creditors, and in addition to other responsibilities, facilitate the development of a plan of reorganization.
  6. Disclosure Statement: Costly disclosure statements are no longer a required component of the reorganization plan confirmation procedure.
  7. Timeline: A debtor’s plan or reorganization must be filed within ninety (90) days of the petition date. The plan must be for a minimum of three (3) years, but not more than five (5) years. Additionally, a status conference will be held within sixty (60) days of the petition date in a Chapter 11, Subchapter V bankruptcy case.
  8. Only the debtor can file the plan of reorganization: For a Chapter 11, Subchapter V bankruptcy, only the debtor is permitted to file a plan of reorganization. This new rule is a departure from other Chapter 11 cases where any interested party may file a plan of reorganization.
  9. Debt Discharge: According to Section 1192, the debtor’s remaining debt will be discharged during the first three years of the plan if the debtor completes the payments required under a confirmed plan.
  10. Loan Modification: A plan of reorganization under Subchapter V bankruptcy may modify a loan secured by the debtor’s personal residence so long as the loan proceeds were used primarily for the small business at issue, and not to secure the personal residence.

It is likely that these changes and additions to the Chapter 11 Bankruptcy Code ease the path to bankruptcy reorganization for small businesses. 

However, these are considered limiting portions of the SBRA:

  1. The small business debtor is discharged from its pre-petition debt only after payment of all sums due within the first three years following effectiveness of its plan or up to five years if determined but the court, as opposed to immediately upon confirmation of the plan as with other Chapter 11 bankruptcy cases; and
  2. The debtor must commit all its disposable income to making payments under the plan or reorganization.

SBRA Eligibility Expanded by the CARES ACT

The CARES Act works jointly with the SBRA to increase the availability of Chapter 11 assistance to a greater number of small businesses. The broadening of bankruptcy protections will help to stem the financial damages caused by coronavirus.  Section 1113 of the CARES Act amends the debt eligibility threshold for a period of one year, up from $2,725,625 to $7.5 million.

If you are a small business owner and would like to discuss your options relating to bankruptcy under the SBRA and the CARES Act, please contact HoganWillig Attorneys at Law at 716-636-7600.

DISCLAIMER: This article has been published as a service to the general public, and, as such, is intended for general purposes only. The information contained within this article should not be considered and/or construed as legal advice. Each reader is advised to consult legal counsel to determine how the contents of this article may apply to their particular facts and circumstances.

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