For years, small business debtors struggled to reorganize effectively after filing for Chapter 11 Bankruptcy. However, the signing into law of the Small Business Reorganization Act of 2019 (SBRA) aims to address some of these issues. SBRA (aka new Chapter 11v) will strike a balance between chapters 7 and 11 bankruptcies for small-business debtors. As such, it will make small business bankruptcy processes faster and less expensive.
Apart from lowering the cost of filing for Chapter 11v bankruptcy, the act also streamlines the reorganization plan confirmation process. As a result, small businesses can survive bankruptcy and retain operational control.
What is the Small Business Reorganization Act (SBRA)?
Legal commentators had long lamented the high costs and complexities of chapter 11 bankruptcy and the toll it took on small businesses’ ability to reorganize successfully. In response, Congress legislated and passed the Bankruptcy Code amendments called the Small Business Reorganization Act (SBRA). President Donald Trump signed SBRA into law on August 23, 2019 and was enacted on February 19, 2020.
The Difference between Chapter 7 and new Chapter 11v
Before SBRA, struggling businesses that considered bankruptcy faced two options: Chapter 11 or Chapter 7.
- Chapter 7
Upon filing, the court creates a bankruptcy estate comprised of a debtor’s nonexempt property. The U.S. Trustee then appoints a trustee and tasks him or her with liquidating the assets of the debtor (bankruptcy estate) and distribute the proceeds to creditors. It’s not an option for a business that hopes to survive bankruptcy and retain operational control over its affairs.
- Chapter 11
Under chapter 11, a debtor retains control over his or her business operations and restructures all debts through a court-approved plan. However, the operational control that the debtor maintains is contingent on increased oversight from the U.S. Trustee and the bankruptcy court.
The debtor’s plan to repay debts is subject to the bankruptcy court’s stringent requirements. What’s more, the court must confirm (approve) everything before allowing the debtor to exit bankruptcy. Throughout the bankruptcy period, the debtor must obtain the court’s approval of non-ordinary business transactions. They must also comply with all the monthly reporting requirements of the U.S. Trustee. A plan of reorganization had to be voted on by the creditors after filing a comprehensive disclosure statement for reorganization.
As a result, many small businesses could not afford chapter 11 costs, and they found the requirements challenging to keep.
Why the Need for SBRA?
The new Chapter 11v SBRA strikes a balance between chapter 11 and chapter 7. Under the Chapter 11v some debtors could retain control over their daily business operations while reorganizing. Fortunately, they won’t be subject to the costly requirements in regular chapter 11. In short, many of the amendments of the SBRA will streamline the plan confirmation processes and potentially reduce their total costs.
Provisions of the Small Business Reorganization Act (SBRA)
The new Chapter 11v SBRA contains several key provisions intended to simplify and streamline the small business reorganization process and reduce costs. They include the following:
Appointment of a Trustee
The U.S. Trustee will appoint a trustee to each small-business debtor case whose functions and duties are similar to those of a chapter 13 trustee. They will also help ensure the reorganization process stays on track. While the small business owner will have authority over the daily operations, the trustee will perform specific oversight functions such as payments administration under a confirmed plan.
No Creditor Committees
It further provides that there will not be an appointment of a committee of creditors unless the bankruptcy court orders one for cause. It will decrease the costs associated with the regular chapter 11 since, after the appointment of a creditor committee, it can decide to hire its professionals at the expense of the debtor.
No Disclosure Statement
SBRA does not require disclosure statements. However, the debtor’s plan must include information generally found in a disclosure statement, such as a liquidation analysis, summary of historical operations, and projections that demonstrate an ability to make all payments under the proposed plan.
No Potential Competing Plans
The SBRA permits only debtors to file plans of reorganization. Thus, the debtor reserves the exclusive right to file their plan within 90 days from the bankruptcy petition date, unless extended for cause.
No Absolute Priority
Debtors need not observe the absolute priority rule that generally prohibits business owners from retaining equity unless creditors are paid in full. What’s more, the confirmation of plans is possible despite the objection of one or more impaired creditor classes.
To obtain such conformation through a “cramdown,” the debtor need only demonstrate that their plan is fair, equitable, doesn’t unfairly discriminate, and it provides for the contribution of all the projected disposable income of the debtor.
Discharge Provisions
After the confirmation of a debtor’s plan with the consent of the affected creditors, they will receive a discharge of their debts upon plan confirmation.
Deferral of Administrative Expense Payments
Debtors can differ administrative expense payments over the life of the reorganization plan for up to five years. These expenses are typically due on the effective date of the reorganization plan.
Residential Mortgage Modification
The SBRA authorizes small business debtors to modify residential real estate mortgages to the extent that loan proceeds go into the business. Such relief was previously unavailable.
The Bottom Line
For years, the benefits of the regular Chapter 11 reorganization were elusive to small business debtors due to their size, their limited financial resources, as well as the requirements and expense of filing for bankruptcy. The Small Business Reorganization Act (SBRA) attempts to remedy a lot of these challenges to ensure successful small business reorganizations.
The Chapter 11v SBRA’s elimination of potential competing plans and disclosure statements will prevent contested hearings that only prolong the reorganization process while increasing costs for debtors. It also relaxes the requirements to confirm plans over creditors’ objections provided they are fair, equitable, and don’t discriminate unfairly.
Ultimately, by lowering reorganization costs and simplifying plan confirmation processes, the Chapter 11v SBRA aims to provide a suitable option for small businesses that wish to reorganize.
When you feel like your small business debts have taken control of your life, Philadelphia bankruptcy attorneys Cibik & Cataldo, P.C., can help you find the right bankruptcy option. Contact us or call us today at (215) 735-1060 and start your journey to financial freedom.
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