The Small Business Reorganization Act (“SBRA”) was signed into law in August 2019 and became effective in February 2020. The SBRA makes Chapter 11 bankruptcy more accessible and less expensive for small businesses by establishing a process for small business debtors under Chapter 11 that is similar to the bankruptcy process under Chapter 12 for family farmers and Chapter 13 for individuals.
The SBRA creates new subchapter V of Chapter 11 of the Bankruptcy Code specifically for small business debtors, which are defined as a person in a commercial or business activity with less than $2,725,625 in noncontingent secured and unsecured debt. When the SBRA became effective, no one knew that a global pandemic was on the way, which would result in further changes to the SBRA. However, that is exactly what happened. On March 27, 2020, Congress increased the debt threshold for small business debtors to $7,500,000 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. After one year, the debt threshold will revert back to $2,725,625. Since Subchapter V is a more streamlined and affordable process, many businesses who have been considering Chapter 11 bankruptcy may want to take advantage of the increased debt threshold this year.
The SBRA’s major changes to the typical Chapter 11 procedures include the following:
Appointment of a Trustee
Under Subchapter V, a trustee is automatically appointed. However, the debtor retains control of its assets and operations. Although Subchapter V trustees have authority to investigate the debtor’s financial affairs, their primary function is to facilitate a consensual plan among the debtor and its creditors and to oversee the plan confirmation process.
No U.S. Trustee Fees
Subchapter V small business debtors are not required to pay quarterly fees to the United States Trustee.
No Committee of Unsecured Creditors
Unless the Bankruptcy Court for cause orders otherwise, no committee of unsecured creditors is appointed in a Subchapter V small business Chapter 11 case.
Streamline the Reorganization Process
A status conference will be held within 60 days of the petition date. A debtor is required to file a plan of reorganization within 90 days of the petition date, and only the debtor can file a plan. However, the Bankruptcy Court may extend this deadline “if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.” Due to the COVID-19 pandemic, courts will likely liberally grant extensions. Further, the debtor is not required to file a disclosure statement.
Elimination of the New Value Rule
There is no requirement that the debtor’s equity holders provide new value to retain their equity interest in the debtor even if creditors are not paid in full. However, the debtor must commit its projected disposable income to plan payments.
The requirements for plan confirmation include:
(a) the plan does not discriminate unfairly;
(b) the plan is fair and equitable, and
(c) the plan provides that all of the debtor’s projected disposable income will be applied to plan payments for the next three to five years or the value of property to be distributed under the plan is not less than the projected disposable income of the debtor for the next three to five years.
Modification of Certain Residential Mortgages
Residential mortgages can be modified if the underlying loan was not used to acquire the residence and was primarily used in connection with the small business.
Delayed Payment of Administrative Expense Claims
The SBRA removes the requirement that a debtor pay all administrative expense claims on the effective date of the plan. Instead, a small business debtor may pay administrative expense claims over the term of the plan.
If you have any questions about Subchapter V of Chapter 11, or any other bankruptcy & creditors’ rights matters, please feel free to contact the attorneys in Leech Tishman’s Bankruptcy & Creditors’ Rights Practice Group.
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