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Small Business Reorganization Act of 2019 and CARES Act Benefits for Bankruptcy Filers

Small Business Reorganization Act of 2019 and CARES Act Benefits for Bankruptcy Filers

During economic hardships, small businesses may need to utilize the oft option of filing for bankruptcy protection to reorganize their debt. Bankruptcy often is considered a last resort option. Yet, it provides a powerful mechanism for individuals and small businesses to reorganize and manage their debt. The Small Business Reorganization Act of 2019 (“SBRA”) added Subchapter V to chapter 11 of Bankruptcy Code to further assist qualifying businesses with debt relief. 11 U.S.C. §§ 1181-1195. The Debtor friendly provisions added to the Bankruptcy Code with Subchapter V of chapter 11, make reorganizing debt a more streamlined and less expensive process for small businesses.

To take advantage of the small business friendly additions to the Bankruptcy Code, the debtors must choose to have their bankruptcy filing administered under Subchapter V. If a debtor does not choose this option at the time of filing a petition, the bankruptcy will be administered in accordance with the previously established chapter 11 provisions that require rigorous reporting and confirmation process. The election to use Subchapter V procedures is incredibly useful to/for sole proprietorships, single member limited liability companies, and single stockholder corporations. A small business must opt to use Subchapter V when their petition is filed in accordance with interim rules. To be eligible to take advantage of the Subchapter V process, the debtors must demonstrate that they are a small business as defined by code in 11 U.S.C. §101(51d); their debt does not exceed the statutory limits; and 50% or more of the debt must be business related. More small businesses than before are able to qualify for relief under Subchapter V as the Coronavirus Aid Relief and Economic Security Act (“CARES Act”) temporarily increased the debt limit for a filing from $2,725,625.00 to $7,500,000.00.

After filing under Subchapter V, the debtor retains possession of its business and controls the business operations, unless otherwise ordered by the court. The debtor is the only party that can file a Plan to reorganize its debts and an unsecured creditor committee is not appointed. 11 U.S.C. § 1181. By retaining control of the business operations and being a debtor in the possession, the small business under a Subchapter V filing has duties and authority similar to a trustee in a bankruptcy filing that has not been streamlined. The debtor’s authority and duties that otherwise would be held by a trustee are detailed under chapter 3 of the Code.

An important duty of the debtor is providing the required documentation. At time of filing a case or shortly thereafter, the debtor is required to file : Schedules and a Statement of Financial Affairs; tax returns; balance sheets; operations statement; cash-flow statement; and a Plan.

The debtor must file a Plan that provides for its creditors within 90 days of an order for relief. The 90 day requirement is much shorter than the 300 days allowance to file a plan for other chapter 11 filings.

The debtor’s Plan must include information about its business operations; its ability to make Plan payments; and how much unsecured creditors could receive in the event of a liquidation. The proposed reorganization plan also must include a provision to allow for the submission of future earnings of the business. Additionally, the debtor’s Plan can include a modification of a secured claim on residential property related to debt that was incurred for the business.

After the debtor has met its document requirements and a Plan has been filed, the Plan will be confirmed and be seen as a final reorganization plan if the debtor has met the requirements provided by previously established rules under chapter 11, it is a “fair and equitable” Plan, and pays disposable income into the Plan. The debtor may have its Plan confirmed under Subchapter V pursuant to §1190(a) or §1190(b). A key difference of confirmation under one of the subsections is when the debtor receives a discharge. If the Plan is confirmed under §1190(a), then the debtor receives a discharge after confirmation. As with receiving a discharge under any other chapter of bankruptcy, there are exceptions to discharge and a small business may still owe certain creditors post-bankruptcy. If the Plan is confirmed under §1191(b) and one or more secured creditor is only receiving the fair value of the collateral, then the debtor receives its discharge after completing the necessary repayment. Additionally, a Plan confirmation under §1191(b) requires that payments to creditors are made by a trustee and maintains the automatic stay protection from creditors. While it may appear advantageous for the debtor to make its own payments and eliminate the third party trustee, the debtor also eliminates the important protection it may need from creditors during the repayment plan.

Subchapter V makes the process of establishing a plan of reorganization for small businesses less arduous than otherwise filing for relief under chapter 11. Subchapter V also makes it more feasible for small businesses to afford and successfully complete a repayment plan by limiting the participation of unsecured creditors and trustees which streamlines the procedural requirements for debtors.

Categories Banking and Lending Bankruptcy Litigation-Creditors Bankruptcy Services COVID19

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