President Donald Trump on Aug. 23 signed the bi-partisan Small Business Reorganization Act of 2019, which is the most significant change in more than a decade for small businesses seeking to re-organize under Chapter 11 of the U.S. Bankruptcy Code.
SBRA was supported by both the American Bankruptcy Institute and the National Bankruptcy Conference. Companies that file for bankruptcy protection under Chapter 11 seek to re-organize their debts by re-structuring payments, obtaining additional time to pay creditors, reducing interest rates and, in some instances, discharging debts.
Unfortunately, prior to SBRA, the administrative costs and procedures of a Chapter 11 filing effectively precluded most small businesses from qualifying. The same political policies that brought you “too big to fail” resulted in most small companies being “too small to file.”
While large companies like GM could afford the administrative costs necessary to successfully re-structure and thrive in a Chapter 11 bankruptcy, small companies were forced to liquidate and close.
SBRA creates a new streamlined subchapter V to Chapter 11. The new subchapter V will apply to businesses with aggregate debts of less than $2,725,625. Key streamlining provisions of SBRA include:
— The elimination of the requirement for the debtor to obtain approval of a separate disclosure statement.
— The elimination of the requirement for the debtor to solicit votes to confirm a plan.
— The elimination of the requirement for the debtor to pay all administrative claims at the effective date of the plan.
— The elimination of the “absolute priority rule,” which means equity holders can retain their ownership without fully paying senior claims.
— The appointment of a standing trustee similar to re-organizations under Chapter 12 and Chapter 13 of the Bankruptcy Code.
If a debtor proposes and completes a bankruptcy plan that does not discriminate unfairly and provides for payment of all projected disposable income, then under subchapter V, the debtor would be entitled to discharge of certain liabilities.
SBRA also provides additional protections for creditors by implementing a standing trustee to oversee the re-organization, reducing the deadline to file a plan from 120 days to 90 days, and increasing the procedural limitations to recover preferential payments.
From a practical standpoint, the SBRA removes many of the procedural and administrative obstacles that have denied small business owners the same opportunity to re-organize that larger companies have benefited from under Chapter 11.
By allowing small businesses to re-organize rather than liquidate, SBRA aims to reduce unemployment, provide more stability for small businesses and increase long-term ownership.
Examples of companies that may benefit from the new subchapter include professional service companies, manufacturers and restaurants.
Under SBRA, those companies could potentially: stop costly lawsuits; reduce or eliminate unsecured debts, such as vendor debts, unsecured lines of credit and credit cards; reduce the interest rate and modify the terms of loans secured by collateral, such as machinery, fixtures and vehicles; repay tax debts over three to five years; terminate costly contracts; and cure the arrears on real estate to prevent a foreclosure.
SBRA will take effect in February 2020. However, small businesses that may be interested in filing for relief under the new subchapter can meet with an attorney well in advance of the enactment date to begin analyzing their options and preparing the necessary documents.