04/14/2020

Client Alert

Written by: Michael J. Shavel

Congress just made it easier and less expensive for small businesses to reorganize under Chapter 11. Small businesses continue to struggle under the current social isolation measures in place. The “Small Business Reorganization Act of 2019” (“SBRA”), which just recently took effect on February 19, 2020 was amended by the CARES Act to permit more small businesses to access the protections offered under the SBRA.

The SBRA has enacted limited relief under the SBRA to businesses with debts under $2,725,625.00. The CARES Act increased the availability of relief to businesses with debts up to $7,500,000.00 - but note that the window for this increase is only one year.

SBRA provides an effective and cost-efficient procedure for the reorganization of a small businesses. Prior to the enactment of the SBRA, many small businesses found traditional Chapter 11 proceedings difficult and expensive. As a result, many small businesses found themselves closing their doors rather than attempting an expensive and complex trip through the bankruptcy process. The goal of the SBRA was to make small business bankruptcies faster and less expensive.

SBRA was not Congress’ first attempt to address the issues of small business reorganizations. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“2005 Act”) included special provisions for small business debtors. However, the 2005 Act remained complex and was not generally utilized.

Congress addressed the shortfalls of the 2005 Act with the SBRA creating a business Chapter 13 where small businesses could reorganize in an efficient and less expensive manner. To address some of shortfalls under Chapter 11 and the 2005 Act, the SBRA created Subchapter V under Chapter 11 which eliminated many barriers for the small business attempting reorganization under Chapter 11. Notably Subchapter V provides the following:

• There is no creditors committee.
• A case trustee is appointed. The private trustee monitors the debtor’s progress during the case in order to promote consensual plans of reorganization.
• There is no requirement to file a disclosure statement. The plan of reorganization will include a brief history of the business, a liquidation analysis and financial projections.
• A plan of reorganization must be filed within 90 days. All of the debtor’s disposable income must be put to plan payments to creditors, and the plan must be at least three years and cannot exceed five years.
• Only the debtor can file a plan.
• No United States Trustees fees.
• Owners are able to retain their interests in the business.
• If the debtor completes the payments required under a confirmed plan, it receives a discharge of the remaining debt.

These changes open the door for a small business to reorganize its debts, deal with its landlords and return to profitability. To discuss all options available, be sure to contact Hill Wallack. Our experienced attorneys can guide your small business through this economically challenging time while protecting the business you have worked to grow.

For more information regarding SBRA, contact Michael Kahme, Esq. at 609-734-6383 or Michael J. Shavel, Esq. at 267-759-2071.

©2020 Hill Wallack LLP. All rights reserved. Please contact Hill Wallack for permission to reprint. Notice: The purpose of this Client Alert is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, accuracy and completeness of which cannot be assured. This Client Alert should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.