Before Congress passed all of the COVID-19 relief legislation, it passed the Small Business Reorganization Act (“SBRA”). No one could have predicted COVID-19 when this legislation was passed. However, that legislation just might assist those small businesses who need the opportunity to reorganize, under the protection of the bankruptcy court. To currently qualify, the small business needs to have debt under $7.5MM (that amount is good through March 27, 2021), thereafter it is anticipated that the debt threshold will return to the $2.725MM.
Increased Scope Protects More
Based on the increase of that debt threshold, far more small businesses fit within the definition of small business and may avail themselves of the protections of this new subchapter of Chapter 11 of the Bankruptcy Code. That presents both the small businesses and their creditors with a new environment to work within, one that is not unlike a Chapter 13 for individuals or Chapter 12, which is for farmers. Subchapter V of Chapter 11 (as well as Chapter 13 and Chapter 12) provides for debt restructuring while prohibiting creditors from taking certain actions outside of the bankruptcy court.
The highlights of Subchapter V of Chapter 11 include many provisions that streamline the process, making it faster and more economical than the standard Chapter 11 process that is used for publicly traded companies. In this new version of Chapter 11, small businesses can realistically move to a plan of reorganization for their business within 90 days of filing the bankruptcy petition. And, as a general rule there is no need for an unsecured creditors committee, no need for filing a disclosure statement, no need to pay quarterly U.S. Trustee fees, all of which add time and expense. Further, creditors and debtor alike should be aware that a debtor under Subchapter V can “cramdown” a creditor’s secured claim, while retaining their equity interest in the business as they exit bankruptcy.
There are many “ifs, ands, and buts” throughout this new bankruptcy process. Carlson Dash has been providing webinars to our institutional clients in preparation for what will unfortunately be an influx in small business bankruptcy filings in the very near future. If you would like more information about this new form of bankruptcy for small business, please reach out for a private consultation or to schedule a webinar.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.