The Small Business Reorganization Act of 2019 (SBRA) added a new Subchapter V to Chapter 11 of the Bankruptcy Code, which was intended to “streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.” Prior to the SBRA, using a Chapter 11 bankruptcy to restructure took a long time and was often cost-prohibitive for small businesses, forcing many to liquidate instead.
Just weeks after the SBRA took effect in February 2020, Subchapter V eligibility was temporarily expanded by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in a bid to help more businesses survive the pandemic. The debt limit to qualify as a small-business debtor was increased from $2,725,625 to $7,500,000 through March 27, 2021. At the last minute, Congress extended the higher debt limit once again through March 27, 2022.
Fewer Hurdles and Lower Costs
As always, filing for bankruptcy protection under Chapter 11 halts creditor collections and buys time for owners to renegotiate the terms of their debt, leases, and other contractual obligations. Subchapter V loosens many of the requirements that make the traditional process difficult and expensive for small businesses to navigate.
Debtors who elect to proceed under Subchapter V must file a Chapter 11 plan (consensual or nonconsensual) within 90 days of filing, reducing the amount of time spent in bankruptcy. Debtors don’t have to pay U.S. Trustee fees or file disclosure statements, creditors are not allowed to file competing plans, and certain committees have been eliminated — all of which helps to reduce the overall cost.
Forging a New Path
The Chapter 11 plan must include a brief history of the debtor’s business operations, a liquidation analysis, and projections that demonstrate the debtor’s ability to make plan payments. The debtor is required to contribute all net operating income (after expenses such as rent, payroll, and goods) to pay creditors for the next three to five years.
A specialized trustee is appointed to monitor the case and facilitate the confirmation of a viable reorganization plan — not to control the debtor’s assets or operations. While the emphasis is on the development of a consensual plan, the court can confirm a nonconsensual plan that it views as “fair and equitable” even if creditors don’t like it, and the owners can keep their equity and continue running the business. Still, creditors must be paid at least as much as they would in a Chapter 7 liquidation.
Bankruptcy may offer a fresh start, but there are many potential financial and legal consequences to consider. Be sure to consult a qualified legal professional.
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