The Small Business Reorganization Act of 2019 Makes Chapter 11 a Better Option for Many Small Business Debtors
On August 26, 2019, the administration signed into law the Small Business Reorganization Act (“SBRA”), which will go into effect on February 22, 2020. The SBRA’s stated objective is to streamline the bankruptcy process for small businesses to reorganize and rehabilitate their financial affairs. H. Rep No. 116-171, at 5 (2019). Once the SBRA goes into effect, there will be a new subchapter V added to Chapter 11 which will provide for more debtor-friendly rules that make Chapter 11 a more attractive option for small businesses considering reorganization.
A small business, as defined in 11 U.S.C. § 101 (51D), is a business with aggregated liabilities that do not exceed $2,725,625.00. The SBRA provides qualifying small business debtors with a cheaper, condensed Chapter 11 proceeding. The new law does this by making around two dozen sections of the Bankruptcy Code inapplicable to small business cases. §1181. Additionally, the new subsection creates a qualified “standing trustee: with oversight responsibility, as opposed to the appointment of a creditors’ committee, and establishes that only the small business may file a reorganization plan, and such plan must be filed no later than ninety (90) days after the order for relief was requested. §1189. The requirements for confirmation of a plan have also been reduced as long as it is “fair and equitable with respect to each class of claims and interests.” The small business must either (a) provide all of the projected disposable income for 3-5 years as receivable by the creditors or (b) distribute the value of the property if it is not less than the projected disposable income of the business. This makes it so that a business owner who complies with the payment schedule in their plan can retain possession of all property.
Additionally, the SBRA creates a mechanism that allows a modification of loans secured by the debtor’s principal residence if the loan was used for the small business. Lastly, the fees and hurdles associated with the plan and confirmation hearing have been reduced.
The SBRA is a landmark piece of bankruptcy legislation that impacts businesses and lenders alike. The law will impact creditors’ recovery methods and the relief qualified debtors may seek.
Authored by: Robert Loughran, Law Clerk (Texas A&M University School of Law)