Small Business Reorganization Act and Bankruptcy

The Small Business Reorganization Act (SBRA)  streamlines the Bankruptcy Chapter 11 process for small businesses. This new tool helps small businesses reorganize their debts that is effective as of February 19, 2020.  The Act creates a new Subchapter V under Chapter 11 of the Bankruptcy Code .  The act is modeled after the expedited procedures used in Chapter 13  cases and is cheaper and quicker than your traditional Chapter 11 Bankruptcy .

Subchapter V, a Simplified Chapter 11 Bankruptcy

Subchapter V is simplified by not requiring all the steps as a traditional Chapter 11.  Subchapter V requires the Court to appoint an attorney to act as bankruptcy trustee.  The Subchapter V bankruptcy trustee makes the bankruptcy estate easier and faster to reorganize.  The Trustee works with the debtor and creditors in getting agreements among them.

There are numerous differences between the Small Business Reorganization Act (SBRA) and a traditional Chapter 11 Bankruptcy .  Like in a Chapter 13 Bankruptcy, there is a debt limit in order to qualify for SBRA relief. Only Debtors with secured and unsecured debts totaling not more than $2,725,625 may file under the SBRA.  There is also a trustee appointed in every SBRA case  that serves in a role similar to a Chapter 13 trustee in disbursing plan payments.  There is no need to draft a disclosure statement or solicit votes from creditors and only a Debtor can file a plan. The plan length may be no less than three years and no more than five years.  The biggest change the SBRA makes is the elimination of the absolute priority rule  for small business debtors.  Currently, a small business debtor generally would need to either put new money into the plan or pay creditors in full to confirm a Chapter 11 plan over the objections of creditors.  Now a small business debtor just needs to pay all of their disposable income during the plan period from 3 to 5 years.

Differences between Small Business Reorganization Act and Chapter 13

Despite the similarities to Chapter 13, there are also differences between the Small Business Reorganization Act and a Chapter 13 case.  While only individuals may file for Chapter 13, corporations and other small businesses may file under the Small Business Reorganization Act.  The plan must be drafted to include information that would normally be included in a disclosure statement such as a brief history of the business operations, a liquidation analysis and a projection of the debtor’s ability to make payments under the proposed plan.  The most significant departure from a Chapter 13 case is the ability to modify the rights of a secured creditor with a lien on the principal residence under an SBRA plan if the “new value”  received from the loan was not used primarily to acquire the residence and was used primarily in connection with the small business.