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The Purpose of the Small Business Reorganization Act of 2019

Effective February 2020, the Small Business Reorganization Act of 2019 provides a simpler process for small business that wish to reorganize. The Committee for the Judiciary stated that the SBRA “will streamline existing bankruptcy procedures and provide new tools to increase a small business’ ability to achieve a successful restructuring.” The Committee also noted that “Chapter 11 was designed for administering complex business reorganizations involving multi-million dollar companies. Despite containing several provisions specifically focused on small business debtors, there has been a significant amount research showing that Chapter 11 may still create difficulties for small businesses, including high costs, monitoring deficits, and procedural roadblocks. The SBRA will add a new subchapter V to Chapter 11 to address these issues, leading to more successful restructurings, reducing liquidations, and increasing recoveries to creditors.”

The Differences Between a Typical Chapter 11 and a Small Business Reorganization Act Chapter 11

Subchapter V of Chapter 11 must be elected by a small business debtor in order to be used. Once elected, only the debtor may file a plan but must do so within 90 days of filing, no unsecured creditors’ committee is appointed, a standing trustee is appointed in every case who acts similarly as a Chapter 13 trustee and the Court can confirm a plan without the support of any class of claims so long as the plan does not discriminate unfairly and is deemed to be fair and equitable by providing that all of the debtor’s disposable income is applied towards the plan. The debtor also has the option of whether or not it wishes to be a debtor-in-possession. Also, there is no requirement to pay quarterly U.S. Trustee fees which can range from $325 and upwards.

In order to streamline the new Chapter 11 process, within 60 days after filing the Court will schedule a status conference “to further the expeditious and economical resolution of a case under this subchapter.” Within 14 days before the status conference, the debtor must file with the court a report that details the “efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization.”

A discharge under the SBRA is entered after 3 years of payments are made except for debts on which the payment is due after the first 3 years of the plan but not longer than 5 years. 11 U.S.C. § 1192.

A significant change under the SBRA is that the Chapter 11 plan can modify the rights of a creditor secured by the debtor’s principal residence, provided that the loan secured by the residence was used for business purposes and not to purchase the residence. This can be particularly useful for small business or individuals that have taken out business loans in which they pledged their home as collateral under an Indemnity Deed of Trust.

In an SBRA case, a business owner also does not have to provide new value to retain their equity interest in the business as long as the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests.

The Requirements of the Small Business Reorganization Act Chapter 11 Plan.

The requirements of a plan under the SBRA are that it include a brief history of the business operations of the debtor, a liquidation analysis and projections with respect to the ability of the debtor to make payments under the proposed plan of reorganization. The plan must also provide for the submission of all or such portion of the future earnings or other future income of the debtor to the supervision and control of the trustee as is necessary for the execution of the plan. 11 U.S.C. § 1190.

Changes to Preferences.

The SBRA also changes preference laws to make it more difficult for the debtor-in-possession or trustee to recover preference payments. The claim asserted must be “based on reasonable due diligence in the circumstances of the case and taking into account a party’s known or reasonably knowable affirmative defenses under subsection (c).” The limits on filing a preference action in the venue in which the defendant sides have also been raised to $25,000.00, making it more difficult to cost-effectively file preference actions.

The SBRA can be a less expensive and streamlined process for small business as well as individuals whose debts exceed the Chapter 13 debt limits. By easing some of the burdens of a regular Chapter 11 case, it could make Chapter 11s less expensive and therefore more within reach of small business owners who wish to reorganize.

If you have questions about the Small Business Reorganization Act of 2019, please call Steiner Law Group at 410-670-7060.