August 27, 2020

Streamlined Bankruptcy Protection for Small Businesses

The economic conditions caused by the COVID-19 pandemic are wreaking havoc on businesses everywhere.  In an effort to help small businesses in these difficult times, Congress has revised certain provisions of the U.S. Bankruptcy Code, as part of the $2 trillion Coronavirus Aid, Relief and Economic Security Act (the “CARES Act).

A critical and perhaps overlooked part of the $2 trillion CARES Act is its revision of certain provisions of the U.S. Bankruptcy Code.

Specifically, the CARES Act amends the Small Business Reorganization Act of 2019 (SBRA), in Subchapter 5 of the Chapter 11 Bankruptcy Code. For the next year only, businesses burdened with up to $7.5 million in debt will now qualify for a simpler, more streamlined, and highly cost-effective “small business” restructuring. Eligibility will revert back to the original $2.7 million debt threshold after one year.

The Chapter 11 process was traditionally long, expensive and litigation heavy, and so not a viable option for most small businesses (and sometimes even large businesses).

This temporary amendment, however, recognizes the need businesses have to be able to restructure present and even future debt obligations including, for example, leases, employment agreements, and mortgages. Business owners will find that the process is fair, far more efficient, and cost-effective, while also giving them control over their affairs.

Here are some of the key features of a SBRA case:

The process will be quicker. The deadline for filing a plan is 90 days compared to 120 days in a Chapter 11 case.

Other than the initial filing fee, all other fees are essentially eliminated. Businesses or individuals are not obligated to pay quarterly U.S. Trustee fees, which in a traditional Chapter 11 case can be significant. Unlike a typical Chapter 11 debtor, in an SBRA case, a small business debtor may stretch payment of administrative expense claims over the term of the plan.

A standing trustee will be appointed in every SBRA case to help develop a plan. Unlike typical Chapter 11 cases, the SBRA trustee is not looking to operate your business, but to help you resolve the case with creditors.

No creditor committees. A creditor committee can be a serious obstruction to having a plan approved. In a Chapter 11, a single creditor can stop a plan from being approved. In a Subchapter 5, by contrast, there is no absolute priority rule used in corporate bankruptcies to decide the portion of payment that will be made to each participant. This allows business owners to keep their interests in the company even if unsecured creditors will not be paid in full under the plan.

Only the debtor is allowed to file a reorganization plan, eliminating the conflict that can be caused by competing plans filed by creditors.

Because of the economic conditions caused by the COVID-19 pandemic and the temporarily heightened debt limits under the CARES Act, increased bankruptcy filings are likely in the coming months.