Until recently, small-business owners in financial distress found it difficult, if not impossible, to seek bankruptcy protection. The ability to seek relief from adverse creditor action and successfully reorganize their businesses was hampered by the costly and onerous requirements that characterized a traditional reorganization under Chapter 11 of the Bankruptcy Code.
Due in large part to the relatively small size of their business operations and annual income, small-business owners could not afford the costs associated with a Chapter 11 bankruptcy reorganization case. Those same owners likewise had secured and unsecured debts that were at a level that disqualified them from seeking relief under Chapter 13 of the Bankruptcy Code, leaving them with few options to save their businesses.
The Small Business Reorganization Act of 2019 (SBRA) was enacted to address this dilemma. Signed into law by President Donald Trump in August 2019 as a subchapter to Chapter 11, the new act takes effect this month, providing welcome relief for thousands of small businesses that may have otherwise had to close their doors as a result of overwhelming debt.
The SBRA is intended to provide a framework to streamline the reorganization of a small business, thereby expediting the reorganization process, reducing associated costs and removing traditional barriers that could limit a company’s ability to successfully emerge from bankruptcy.
A small-business debtor is defined under the SBRA as a small business with aggregate noncontingent liquidated secured and unsecured debts in an amount not more than $2,725,625. Businesses with debts in excess of this threshold do not qualify for the new procedures.
Under the SBRA, the small-business debtor has an opportunity to propose a plan of reorganization and operate in an environment that is less restrictive and less costly than under a traditional Chapter 11 reorganization — and still retain control of the business. In this regard, the SBRA:
- Provides that the debtor may propose and confirm a plan of reorganization without providing for payment of unsecured creditors’ claims in full and without being required to contribute new value into the plan;
- Makes the debtor eligible for a discharge after completion of payments under a plan of a three- to five-year duration with the exception of nondischargeable debts or debts where the last payment due is after expiration of the three- to five-year period under the plan;