Last year Congress passed the Small Business Reorganization Act of 2019 (SBRA), which amended the Bankruptcy Code to make it easier for small business to reorganize. The SBRA went into effect in February 2020, which was timely considering the coronavirus pandemic which began damaging the economy and squeezing small businesses in March 2020.
Until February, 2020, the Bankruptcy Code permitted small businesses to reorganize through traditional Chapter 11 bankruptcy or to liquidate through Chapter 7 bankruptcy. Small businesses seeking reorganization tended to find Chapter 11 time consuming, complex and costly. Small businesses seeking liquidation were counseled more and more to skip a complicated Chapter 7 liquidation and opt instead for liquidation through a state law assignment for the benefit of creditors.
The SBRA was signed into law on August 23, 2019, and made effective February 20, 2020, with the stated purpose of expediting and reducing the cost of bankruptcy for small businesses. The SBRA created a new Subchapter V of Chapter 11 of the Bankruptcy Code in order to accomplish that goal, which is why the SBRA may be referred to as just “Subchapter V.”. Notably, Subchapter V is available to entities, such as limited liability companies and corporations, as well as individual people. The SBRA limits eligibility for reorganization under Subchapter V to those small businesses and people with not more than $2,725,625 in secured and unsecured debts. However, in an even more recent development, effective March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) raised that debt limit to $7,500,000 for one (1) year.
Subchapter V removed some of the most difficult aspects of traditional Chapter 11 for small businesses, effectively making it easier to get in and out of bankruptcy. Confirmation of a plan of reorganization, arguably the most difficult and time-consuming part of Chapter 11 reorganization, is now more streamlined for small business debtors. Here are some of the main changes:
Exclusive, Expedited Plan of Reorganization.
Under Subchapter V, only the small business debtor can file a plan of reorganization, unlike traditional Chapter 11. However, a small business must file that plan in an expedited, ninety (90) day period within the date of commencing the bankruptcy case.
No Creditors’ Committee.
Under Subchapter V, no committee of unsecured creditors will be formed unless the Bankruptcy Court says otherwise. However, as a safeguard for unsecured creditors, a small business debtor’s plan of reorganization will be confirmed only if it provides for payment of all the small business debtor’s projected disposable income for a three (3) to five (5) year period. This provision is similar to the core requirement for confirmation of a plan in Chapter 13 bankruptcy.
No Ballots or Voting.
Small businesses seeking to reorganize in Chapter 11 regularly experienced difficulty obtaining creditor support for their plans of reorganization and would receive either inadequate or even no votes for their plans. This resulted in debtors regularly seeking Bankruptcy Court approval of their Chapter 11 plans under the cramdown provisions of the Bankruptcy Code. Under Subchapter V, creditor voting is eliminated, and debtors do not need to seek cramdowns, as long as the debtors dedicate their disposable income towards their reorganization.
No United States Trustee.
Subchapter V introduces a new kind of trustee, a Subchapter V trustee, in lieu of the direct oversight of Chapter 11 debtors normally done by the Office of the United States Trustee. A Subchapter V trustee’s main focus is the facilitation of the small business plan of reorganization, rather than broad oversight over every aspect of the small business’ operations throughout its Chapter 11 case.
No Absolute Priority Rule.
One of the most confusing and complicated aspects of Chapter 11 bankruptcy, the absolute priority rule, was also removed from Subchapter V. The SBRA effectively allows a small business to keep all interest in its business even without its owners’ contribution of so-called “new value” towards the reorganization plan, which is required in traditional Chapter 11. This is the case so long as the Subchapter V plan treats all creditors fairly and equitable across the board.
Flexible Payment of Administrative Claims.
Unlike in Chapter 11, small businesses reorganizing under Subchapter V may pay their administrative claims over the term of their plan, like in Chapter 13 bankruptcy, rather than having to immediately pay those claims upon the date of confirmation.
Subchapter V opens up bankruptcy reorganization to an entire class of businesses and people that may have struggled with the complexities of Chapter 11 bankruptcy. This is especially true for at least the next year, as the CARES Act made even more businesses and people eligible to seek Subchapter V relief from the Bankruptcy Court. The relief offered by the SBRA, enhanced by the CARES Act, is timely considering the hardships that small business and people are facing across the United States.
Get A FREE Subchapter V Bankruptcy Consultation
Many variables must be carefully considered in advance of commencing a Subchapter V bankruptcy to increase your chance of successfully reorganizing your business or your own finances.
Consulting with our experienced bankruptcy attorneys is the best way to ensure that you get the perspective you need to understand the full picture. Call 973-218-6877 to get a FREE Subchapter V bankruptcy consultation.