The Small Business Reorganization Act (SBRA), which seeks to make small business bankruptcies faster and less expensive, took effect in February. While the law preceded the coronavirus (COVID-19) pandemic, it is providing welcome relief to businesses impacted by the economic fallout of the ongoing pandemic.

Small Business Reorganization Act

The goal of a Chapter 11 bankruptcy is to help a financially-distressed business restructure its debts and survive as a going concern. During the bankruptcy, the business establishes a court-approved bankruptcy plan to satisfy its financial obligations over time.  If approved by both the creditors and the court, the business emerges from bankruptcy and can continue its operations.

In most cases, small to medium-sized entities have been avoiding Chapter 11 bankruptcies, often using assignments for benefit of creditors instead, due to the costs inherent in Chapter 11 proceedings. The SBRA, also referred to as Subchapter V, is designed to make a streamlined Chapter 11 bankruptcy process available to small businesses.

Under the SBRA, debtors will no longer be subject to the more costly requirements in Chapter 11.  A committee of creditors will not be appointed unless ordered by the court for cause. The debtor will generally not be required to prepare a disclosure statement, and more importantly, only the debtor can file a plan of reorganization. These changes will prevent contested hearings that increase costs.

Chapter 11 bankruptcy cases are also costly because they take so long. To fast-track small business cases, the SBRA provides that an initial status conference be held within 60 days of the filing of petition. The debtor must file a chapter 11 plan within 90 days from its filing of a bankruptcy petition. Much like in a Chapter 13 case, a standing trustee is appointed to oversee each case. The primary role of this trustee is to “facilitate the development of a consensual plan of reorganization.” 

The SBRA also relaxes the requirements to confirm a plan. It eliminates the “absolute priority” rule, which requires that a Chapter 11 Plan be approved by all classes of creditors in order for business owners to retain their ownership interest.

Under the SBRA, equity owners can retain their ownership so long as the plan does not "discriminate unfairly" and is "fair and equitable." It is also easier for the debtor to confirm a plan over creditors' objections. Essentially, a plan will be confirmed so long as it provides that all of the debtor's projected disposable income for three to five years will be used to make plan payments. Disposable income is defined as income that is available after the payment of ongoing business expenses. 

Additional Relief for Small Businesses Impacted by COVID-19

The SBRA is available to debtors (individuals or entities) engaged in commercial or business activities with noncontingent, liquidated, secured and unsecured debts not exceeding $2,725,625. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended the SBRA to increase the availability of its protections. The CARES Act temporarily increases the debt threshold to $7.5 million for new cases filed between March 28, 2020, and March 27, 2021. For businesses significantly impacted by COVID-19, the SBRA, as amended by the CARES Act, may provide a valuable lifeline. To determine whether a Subchapter V bankruptcy may be in your company’s best interests, we encourage you to work with experienced bankruptcy counsel.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Joel Glucksman, or the Scarinci Hollenbeck attorney with whom you work, at 201-896-4100.