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Small Business Reorganization Act

Overview

The Small Business Reorganization Act (“SBRA”) is a new bankruptcy law, effective February 2020, aimed at opening new protocols to help small business successfully reorganize under federal bankruptcy.

Why is this important?

Prior to SBRA, struggling businesses had two options in bankruptcy, Chapter 7 and Chapter 11. In short, Chapter 7 is liquidation, and Chapter 11 allows a business to retain control over its operation while it reorganizes. Under Chapter 7 bankruptcy, a business is appointed a trustee who oversees the liquidation of the business’s assets to pay back creditors, and afterward, the business effectively ceases to operate. Conversely, under a Chapter 11 bankruptcy, the business’s assets are sold off and deals are cut, but in the end, the business continues to operate. Through a Chapter 11 bankruptcy, the business is subject to increased oversight by the bankruptcy court. For instance, the business must have its plan to repay its debts approved by the court, submit monthly reports, have all non-ordinary-course-of-business transactions approved, and pay quarterly fees to the court; all of which add to the expense, complexity, and time it takes to effectuate a Chapter 11 bankruptcy. To help this process along businesses will more than likely require the services of bankruptcy attorneys in Harrisburg PA or wherever their business is based/registered, so they are able to be guided throughout this course whilst getting the correct legal advice.

As a result of the increased requirements of a Chapter 11 bankruptcy, many small businesses cannot afford to make it through a lengthy process fraught with legal pitfalls, leaving dissolution of the business as their only recourse in the face of hungry creditors. Recognizing the difficulty many businesses have navigating, much less surviving, a Chapter 11 bankruptcy, Congress enacted the Small Business Reorganization Act (“SBRA”).

Who qualifies under this new legislation?

In short, small businesses who qualify as a “small-business debtor.” A small-business debtor is a debtor engaged in commercial or business activities… that has aggregate… debts as of the of the date of the filing of the petition or the date of the order for relief in an amount not more than $7,500,000.” 11 U.S.C 1182.

The streamlining of a SBRA case is effectuated through many substantive changes to the bankruptcy process. For instance:

  • Unlike a Chapter 11, the debtor in a SBRA case is appointed a small-business trustee from the start of the case to work out a plan to satisfy the creditors, increasing the likelihood of an approved plan.
  • The committee of creditors is not appointed to the case unless ordered by the court, for cause. Creditor committees are groups of people who represent a company’s creditors in a bankruptcy proceeding, who get a say in the plan for reorganization of the debtor’s company. These committees, though representing creditor interest, are paid for by the debtors. Removal of creditor committees further reduces the fees debtors are responsible for.
  • The SBRA permits only the debtor to file a plan for reorganization. Cutting out the necessity for the debtor to file disclosure statements with the creditors, which in turn reduces the possibility of competing creditor plans and contested hearings, further reducing the cost and time to the debtor.
  • The requirements for confirming a debtor’s plan are relaxed as compared to the other chapters. A plan will be confirmed so long as it provides that all projected disposable income for three to five years will be used to make plan payments.
  • The timeline for plan submission is shortened to 90 days (as opposed to 180 days in a typical Chapter 11).

Utilizing the SBRA

For many small businesses affected by the Covid-19 pandemic, or just experiencing the pitfalls that many small businesses run into, utilizing the SBRA is a realistic option to restructure and carry-on the business. There are other advantages to Sub chapter V, and if you think you may qualify or are looking to explore options in bankruptcy, speak to a licensed attorney.

The above article is for general information purposes only and should not be relied upon as specific legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. If you have any questions or would like to learn more, please contact Coleman Scroggins at coleman@apexlg.com.

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