Breaking the Small Business Reorganization Act 2019

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The federal government made bankruptcy a viable option for small businesses with the passage of the Small Business Reorganization Act (SBRA) of 2019. The law, which went into effect Feb. 19, is designed for small businesses that can’t afford the high administrative fees and costs associated with traditional Chapter 11 reorganizations.

Chapter 11 bankruptcy was crafted with the publicly traded manufacturer in mind, not your local coffee shop or machine shop. Many of the provisions of Chapter 11 are therefore intended for corporations with complex capital structures and operations rather than small family businesses that depend on the talent and labor of a single owner-manager and family members. This design has forced many struggling small businesses to wind down, rather than preserving their value and long-term viability by successfully reorganizing through bankruptcy. SBRA’s goal is to make Chapter 11 reorganization viable for small businesses by accelerating the proposal and implementation of a plan, reducing costs for debtors and providing faster returns for creditors.

The general framework is that a small business debtor files a Chapter 11 petition, elects SBRA protection, and a permanent trustee is appointed. Facilitated by the trustee, the debtor remains in control of his affairs and assets and negotiates and proposes a reorganization plan within 90 days. If a consensual plan is confirmed by the bankruptcy court, the debtor receives a discharge upon confirmation and the trustee is removed. The debtor will then make payments under the plan, usually over a period of three to five years.

If a consensual plan cannot be reached, secured creditors must still be paid in full over the term of the plan. However, owners can retain their interests in the business even if unsecured creditors are not repaid in full. To do this, the debtor and the trustee will calculate the debtor’s disposable income (income minus the expenses necessary to operate the business), and the debtor will pay the disposable income to the creditors for a pro rata distribution over three to five years. . After three to five years, if all plan payments have been made, unsecured debts will be discharged even if not fully repaid, and owners retain their interest in the business. SBRA also allows a debtor to modify a residential mortgage if the underlying loan was not used to acquire the residence and was used primarily in a small business.

Who is eligible for protection under SBRA?

An individual or company having “aggregate, non-contingent, liquidated, secured and unsecured debts as of the date of filing of the petition or of the date of the relief order in an amount not to exceed $2,725,625 ( excluding debts due to one or more affiliates or insiders). The CARES Act, recently passed by Congress to address the economic impact of the COVID-19 pandemic, temporarily increases the debt cap to $7,500,000 for cases filed after CARES takes effect and is applicable for one year thereafter. After one year, the debt limit will revert to $2,725,625 unless Congress extends the increase.

How does SBRA reduce costs for debtors?

In most cases:

  • No committee of unsecured creditors is formed
  • No information statement is prepared and served
  • No quarterly U.S. fiduciary fees are paid
  • No procrastination: the debtor must file a plan within 90 days

Other benefits for debtors?

  • Only the debtor can file a plan, so an angry creditor cannot file his own plan.
  • A permanent trustee is appointed to, among other things, facilitate the development of a consensual plan or reorganization, but the debtor remains in charge of the affairs and in possession of the assets.
  • If the confirmed plan is consensual, the debtor receives a release upon confirmation and the trustee is terminated upon substantial consummation, usually when the debtor begins making plan payments.
  • The plan may modify the rights of a debt secured solely by a security on a building which is the principal residence of the debtor, if the new value received within the framework of the granting of the mortgage has not been used mainly for the purchase of the building, but within the framework of the operation of the company.

Things the SBRA does not do:

  • Provide for a debtor’s stay, so that if the small business owner has personally guaranteed one or more of the business’s debts, a creditor holding that personal guarantee can sue directly against the owner and his or her personal assets, even if the automatic suspension protects company assets
  • If the plan is non-consensual, the debtor does not benefit from a discharge until after the payments (between three and five years from the confirmation)

As companies continue to adapt to new US and global business environments, bankruptcy is just one option for a company that needs to make short- or long-term adjustments to its debt structure. to weather the storm.

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