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Business Bankruptcy-Chapter 11

Bankruptcy subchapter offers DEBT relief for small businesses

 Early into 2020; there will be a NEW Sub-Chapter Bankruptcy relief for financially strapped small business.  President Trump signed “Small Business Reorganization Act of 2019 which add a new Subchapter V to Chapter 11 Bankruptcy petitioners.  February 19, 20202; the SBRA(Small Business Reorganization Act) will go into effect and provides for expedited bankruptcy relief of “small business” as defined by business activity with unsecured debt limits of $2,725,625.  This amount must be non-contingent and unliquidated secured and/or unsecured.

The ABI(American Bankruptcy Institute) believes that HALF of the country's Chapter 11 cases would qualify under this new subchapter. The intent behind this subchapter is to reduce Chapter 7 Liquidation , save jobs, and increase recoveriers to creditors.  The ABI has been a champion of this new law.

There is consensus that Chapter 11 is too expensive with too many rules; code provision and requirements placed on a usually un-sophisticated businesses and business owner.  Currently the same rules, procedures and costs would apply to Chapter 11 filed by General Motors as your mom and pop liquor store. This should not have to be. This is why the new subchapter was created.   This new subchapter will allow the little guy to get the same advantages in Chapter 11 as Exxon Mobil would but without all the cost, procedures and stress. The new subchapter also removes the “absolute priority rule” which is the most difficult rule to overcome as a typical Chapter 11 debtor presently.  In current Chapter 11 cases an unsecured creditor can sit back throughout the case and at the time of confirmation; say that “hey...the plan is not confirmable” as the debtor does not have an impaired accepting class or because of this absolute priority rule. The new SBRA will eliminate the creditors ability to do such.  

The House of Representative, the Senate and the President Congress enacted the SBRA with bipartisan support from both Democrats and Republicans alike.  This new Subchpater will essentially allow a small business owner the same rights and obligations that a Chapter 13-Non Business would have. A small business with total debt unsecured, secured and under $2,725,625 will have access to the bankruptcy court and can propose a plan; as long as the business is dedicating all disposable income to unsecured creditors; they will get a plan confirmed and get the relief they so desperately need.  

The plan will be as set forth presently in chapter 13 either a 3 year plan or a 5 year plan.  The business disposable income is defined under the Bankruptcy Code in §1191(d) as as income received by the debtor that is “not reasonably necessary to be expended” for the maintenance or support of the debtor or dependents, a domestic support obligation, or the “continuation, preservation, or operation of the business.”  This is a good step forward to encourage small business to stay open and seek relief that would otherwise be too expensive and too complicated. There is also no creditor committee like in a typical Chapter 11. The new code states that only “for cause” can a judge allow such committee.  

A creditors' committee allows the creditors to effectively “gang up” on the debtor/business to prevent the relief requested.  This also leads to increased cost. The SBRA provides the debtor the ability to eliminate the risk of the debtor “drowning” in those administrative expenses.

There's a status conference 60 days out, and the plan is required to be filed within 90 days unless there are circumstances beyond the debtor's control that pushes that out,  MOst importantly the SBRA's effective elimination of the need to have an accepting impaired class of creditors for court approval of a plan. The removal of absolute priority rule is a major step forward as removing the impediments to business owners seeking a reorganization remedy in the first place.  The SBRA will allow the debtor to retain his or her business without paying unsecured claims in full or contributing “new value” under the plan as called for under current Chapter 11; keeping jobs and the business afloat.