Making Reorganization More Friendly for Small Business Debtors
Reorganization under Chapter 11 of the Bankruptcy Code creates many difficulties for a small business debtor. Many small businesses fail in Chapter 11 or avoid Chapter 11 because of:
- high cost;
- significant commitment of time;
- risk of loss of ownership; and
- inability to satisfy plan confirmation requirements.
The Small Business Reorganization Act ("SBRA") added a new Subchapter V to Chapter 11, which is designed to take into account the unique needs of small businesses and streamline the reorganization process.
The SBRA became effective February 19, 2020 and makes reorganization under Chapter 11 for small businesses friendlier.
There are very specific guidelines for the SBRA including the following:
The SBRA provisions are not automatic or mandatory. An eligible debtor must elect to proceed under Subchapter V.
Only a "small business debtor'' may elect to proceed under Subchapter V. The debt limitation for a "small business debtor "is $2,725,625, of which not less than 50% must be commercial or business debt.
The debt limitation is increased to $7,500,000 under the CARES Act, but the increased debt limit will sunset one year after March 27, 2020.
A debtor with "single asset real estate" is excluded from eligibility under Subchapter V.
Single asset real estate means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generated substantially all of the gross income of the debtor who is not a family farmer and on which no substantial business is being conducted by a debtor, other than the business of operating the real property and activities incidental thereto.
Only the debtor may file a plan. The debtor must file the plan not later than 90 days after the case is filed.
Confirmation of Plan
In many Chapter 11 cases, a small business debtor may be unable to confirm a plan because
- no class of creditors has accepted the plan; or
- as a condition of confirmation:
- the interests of the owner of the debtor must be cancelled; or
- the owners must contribute significant new value.
Under Subchapter V, the court may confirm a plan even if all classes of claims reject the plan, and the owner of the business may retain a stake in the debtor; provided that, the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims.
The condition that the plan be fair and equitable includes the requirement that all of the projected disposable income of the debtor for a period of three to five years must be applied to make payments under the plan.
Committees can significantly increase the cost of reorganization. Absent cause, a committee of creditors will not be appointed.
United States Trustee Fee (UST)
UST fees can be significant in a Chapter 11 case. Under Subchapter V, the debtor is not obligated to pay quarterly fees to the United States Trustee.
Preparation and approval of a disclosure statement may cause significant additional cost and delay in a Chapter 11 case. Under Subchapter V, absent cause, a disclosure statement will not be required.
Contact Fisher Rushmer today to find out more about the Small Business Reorganization Act and how it may affect you and your business.