Congress has expanded the application of the Small Business Reorganization Act of 2019 (SBRA) to make available the streamlined and, therefore, less expensive form of business reorganization to more businesses.
The SBRA went into effect on February 19, 2020 and provides for some modifications to a typical Chapter 11 reorganization for very small businesses, which streamlines the process in many ways, including:
- Creditor’s committees are eliminated.
- A private trustee is appointed in the case to act as a liaison between the business and its creditors to attempt to arrive upon a consensual plan.
- No separate disclosure statement is required and the extent of documentation relating to the plan is truncated (reducing what was typically a small phonebook-sized document into a smaller packet).
- Only the debtor can file a plan.
- No United States Trustee’s fees.
- Owners are able to retain their interests in the business (no absolute priority rule).
- Individual owners are able to cram down mortgages on their personal residence IF the loan was used for business purposes.
- No need to get votes in favor of a plan.
The major criticism of the SBRA has been the debt limitations – only businesses with debts of less than $2,725,625 were eligible for the streamlined process.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) substantially increases that debt ceiling to $7.5 Million for one year, expanding the availability of the streamlined processes for reorganizing business debts to many small businesses. Once the one year expires (assuming no extension or other change to the law), the debt limit will reduce back down to $2,725,625. Of note: the applicable debt limit is a limitation on the total aggregate debt of a company EXCLUDING unliquidated, contingent debt and insider/affiliate debt.
The relief available under SBRA will require a business to pay creditors all of the business’ disposable income for 3-5 years. In the meantime, however, the business would be able to operate, keep employees in place, and increase the odds of success for the business following the bankruptcy case.
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