The Small Business Reorganization Act (SBRA), also referred to as Subchapter V is designed to serve as a streamlined bankruptcy process for small businesses...
The Small Business Reorganization Act (SBRA), also referred to as Subchapter V, took effect on February 19, 2020, and is designed to serve as a streamlined bankruptcy process for small businesses. The goal is to allow financially-distressed businesses to reorganize without the burden and expense of a Chapter 11 bankruptcy. In the two years since the law took effect, more than 3,000 Subchapter V cases have been filed, according to the American Bankruptcy Institute.
Subchapter V vs Chapter 11
A Chapter 11 bankruptcy allows businesses with significant debt the opportunity to reorganize and remain operational. However, small to medium-sized entities often avoid Chapter 11 bankruptcies, opting to use assignments for benefit of creditors instead, due to the costs inherent in the proceedings. The SBRA, also referred to as Subchapter V, is designed to make a similar yet more cost-effective process available to small businesses.
Under the SBRA, debtors are not 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 important, 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 filing the 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 the principal role 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.
SBRA Debt Threshold
While Subchapter V has a number of significant advantages, it is important to recognize that eligibility is limited to debtors having liquidated debt of less than $3,024,725.00. As originally enacted, the SBRA defined a small business debtor as a person (1) engaged in a commercial business activity, excluding the ownership of single asset real estate as defined in 11 U.S.C. §101 (51B), (2) non-contingent liquidated secured and unsecured debt as of the date of the filing of the petition not more than $2,725,625.00 (excluding debts owing to affiliates and insiders), and (3) the majority of such debts must have arisen from the commercial or business activities of the debtor.
In March 2020, Subchapter V’s debt limit requirement was temporarily increased to $7.5 million as part of the CARES Act. While the provision was initially scheduled to sunset on March 27, 2021, the deadline was extended for another year under the Covid-19 Bankruptcy Relief Extension Act. While legislation was introduced to further extend the threshold, it has not yet been enacted. As of April 1, 2022, debtors eligible for Subchapter V must now have debts amounting to only $3,024,725 or less, which reflects an adjustment for inflation.
Bankruptcy Threshold Adjustment and Technical Corrections Act
The Bankruptcy Threshold Adjustment and Technical Corrections Act, which would restore the higher debt limit for Subchapter V, passed the Senate and is currently under consideration in the House. While the bill enjoys bipartisan support, its likelihood of passage will likely decrease if the House does not act quickly, as members of Congress will soon shift their focus to the upcoming midterm elections.
Key Takeaway for Small Businesses
The SBRA established a valuable tool for small businesses in financial distress. To determine whether a Subchapter V bankruptcy may be in your business’s best interests, we encourage you to contact David Edelberg at 201-896-4100 to review potential options.
What Business Owners Get Wrong Before Meeting a Litigation Attorney
What should you expect when meeting a litigation attorney about a business dispute? You should expect to describe the dispute in your own words, hand over the most important documents, flag any deadlines or immediate threats, and leave with a clearer picture of the problem, what information is still needed, and the likely next steps. […]
Arbitration vs. Litigation vs. Mediation: What New Jersey Businesses Should Know Before Signing a Contract
Arbitration resolves disputes privately before an arbitrator whose decision is usually final, while litigation resolves them in court with full rights of appeal. Whether a business ends up in arbitration or litigation is often decided when it signs the contract, long before any dispute arises. Key Takeaways When facing a contract dispute, carefully consider your […]
Can You Own Part of a New Jersey Business Without a Written Agreement?
Can you own part of a business in New Jersey without a written agreement? Yes, it is possible. Under New Jersey’s Uniform Partnership Act, a partnership can arise when two or more people carry on a business as co-owners for profit, whether or not they ever intended to form one. Ownership doesn’t necessarily depend on […]
Crisis-Proofing Your New Jersey Business: Building a Crisis Response Plan Before You Need One
For New Jersey businesses, crisis preparedness should be viewed as a legal and operational function, not simply an emergency-management exercise. A well-designed crisis response plan can help preserve evidence, protect confidential communications, meet reporting obligations, limit unnecessary exposure, and prevent an already difficult situation from becoming a larger legal problem. Key Takeaways A serious crisis […]
Monmouth County's Next Development Wave: What Developers and Investors Need to Know
Monmouth County is entering a significant new phase of development. For those looking to acquire property or undertake a new project, understanding the market opportunity is only the beginning. The more important question is whether a particular property can actually be developed as contemplated and what approvals, agreements, and other conditions will be required to […]
Are Your Conversations with AI Shielded from Discovery? Courts Are Split
Whether a client’s prompts to a generative AI tool and the documents it produces are protected from disclosure depends on the case type, who claims protection, and whether counsel was involved. In United States v. Heppner, a New York federal judge ruled that a criminal defendant’s communications with an AI platform were protected by neither […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
