Recent Amendments to the Bankruptcy Code: What You Need to Know

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By: Crystal H. Thornton-Illar, Esq.

On August 23, 2019, President Donald J. Trump signed four new bankruptcy amendments into law: (1) the Small Business Reorganization Act of 2019; (2) the Family Farmer Relief Act of 2019; (3) the Honoring American Veterans in Extreme Need Act of 2019; and (4) the National Guard and Reservists Debt Relief Extension Act of 2019.  These amendments are all aimed at making bankruptcy more efficient and less expensive, which will likely result in increased bankruptcy filings in the near future.

The Small Business Reorganization Act of 2019

The Small Business Reorganization Act of 2019 (“SBRA”) is the most extensive reform of the Bankruptcy Code since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 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.” A small business debtor must elect to proceed under subchapter V of chapter 11. Small business debtors can begin using subchapter V in February 2020.

The SBRA’s major changes to the typical Chapter 11 procedures include the following:

  • Appointment of a Trustee – A standing trustee will be appointed to serve as the trustee for the bankruptcy estate but will not operate the business. The trustee will oversee the plan confirmation process and claims distribution. Additionally, small business debtors will not be required to pay quarterly fees to the United States Trustee.
  • 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. The debtor is not required to file a disclosure statement, and no creditors’ committee will be appointed unless the court orders otherwise.
  • 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.
  • Plan Confirmation – The requirements for plan confirmation include: (1) the plan does not discriminate unfairly; (2) the plan is fair and equitable, and (3) 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.

In addition, the SBRA made another change that is applicable to all chapters of bankruptcy effective immediately.  Section 547(b) of the Bankruptcy Code, the preference statute, was amended to include a due diligence requirement.  The trustee may seek to avoid preferential transfers only after considering a party’s known or reasonably known defenses to the avoidance action.

Finally, the SBRA amended the venue provision of 28 U.S.C. § 1409 to increase the minimum limit for a trustee to bring an action against a non-insider in a district other than where the defendant resides from $12,850 to $25,000, which is also effective immediately.

The Family Farmer Relief Act of 2019

The Family Farmer Relief of 2019 (“FFR”) increases the debt limit used to determine whether a family farmer is eligible for relief under chapter 12 from $4,411,400 to $10,000,000, effective immediately.  The FFR amendment will allow more financially-distressed family farmers to file bankruptcy under Chapter 12, the bankruptcy chapter designated specifically for family farmers.  Previously, many family farmers were prohibited from filing chapter 12 because their total debt exceeded $4.4 million due to the increasing costs of technologically advanced farming equipment.

The Honoring Americans Veterans in Extreme Need Act of 2019

The Honoring American Veterans in Extreme Need Act of 2019, which is immediately effective, excludes certain Veteran Administration and Department of Defense benefits from the definition of current monthly income for purposes of means testing, which will allow more veterans to qualify for chapter 7 bankruptcies.

The National Guard and Reservists Debt Relief Extension Act of 2019

The National Guard and Reservists Debt Relief Extension Act of 2019 is effective immediately and extends for four years the exemption from bankruptcy means-testing for certain members of the reserve Armed Forces and National Guard who are called to active duty or to perform homeland defense activity.  People who qualify for this exemption do not have to undergo the means test when filing bankruptcy.