Insights & Resources

Small businesses confronting the stress of a financial decline and considering the option of reorganization under Chapter 11 of the Bankruptcy Code traditionally have had to weigh the substantial cost and long time line of a successful restructuring. To provide flexibility and cost efficiencies in the process, Congress last year passed the Small Business Reorganization Act of 2019 (“SBRA”) affording small business debtors a more expeditious and economical path to reorganization Chapter 11 of the Bankruptcy Code.

When Congress added the SBRA to the Bankruptcy Code it defined a small business debtor as a person or entity engaged in commercial business with aggregate debt of less than $2,725,625. Understanding the limitations this cap imposed, the CARES Act, designed to provide economic stimulus during the COVID-19 crisis, would expand the debt limit for one year to $7.5 million opening this streamlined small business bankruptcy process to a much larger pool of potential debtors.

Some of the efficiencies and appealing aspects of the SBRA process are:
 

• Like in a traditional Chapter 11 case, a small business debtor is permitted to continue operating its business as a debtor-in-possession;

 

• A committee of unsecured creditors typically is not appointed; instead, a trustee is appointed to, among other things: (1) help facilitate the development of a consensual plan of reorganization, (2) investigate and object to proofs of claim, and (3) disburse payments under the debtor’s confirmed plan of reorganization;

 

• Confirmation of a plan can be accomplished without a costly disclosure statement and without having to obtain creditor approval if the plan is fair and equitable and does not discriminate unfairly among similar type creditors;
  • As relates to secured creditors this means that under the plan they either retain their liens on their collateral, receive deferred cash payments equal to such claim or the proceeds of their collateral if sold;
  • A plan is fair and equitable to unsecured creditors if it provides that all of projected disposable income (or property equal to the amount of disposable income) for three (3) to five (5) years will be applied to make payments under the plan; and
  • The debtor demonstrates that it is able to make all payments under the plan or adequate remedies exist if payments are not made.
  • Finally, an additional benefit is that administrative expense claims (i.e. post petition claim) which are entitled to payment in full can be paid over the three (3) to five (5) year life of the plan, rather than on confirmation.

 

• Upon completion of the payments provided for by the plan, the debtor receives a discharge of those debts which arose prior to confirmation of the plan and any other claims allowed under section 503 of the Bankruptcy Code, except for those debts which are non-dischargeable under the Bankruptcy Code and any debt for which the last payment is due outside the three (3) to five (5) year term of the plan.

 
Should you have any questions regarding the above, please contact the Garfunkel Wild attorney with whom you regularly work, or speak to a member of our Bankruptcy and Restructuring department.