In August of 2019, President Donald J. Trump signed into law the Small Business Reorganization Act of 2019 (SBRA). The Act (SBRA) became effective in February of this year. This Act, which was passed long before we knew what COVID-19 was, attempted to cure some of the difficulties that small businesses often encounter trying to reorganize under Chapter 11. Because of the overwhelming requirements and disclosures required of a traditional Chapter 11 case, the process was, in many small business cases, unwieldy and infeasible due to the circumambient costs and professional fees which result in a traditional Chapter 11 case.
The SBRA is found in the United States Code Title 11 in sections 1181- 1195 (11 U.S.C §§1181-1195). This is now commonly known as Subchapter V of the bankruptcy code. This act of Congress turned out to be fortuitous as Chapter V may indeed become a vital and most useful tool in the saving of the heart and soul of America’s economy, The Small Business.
Much like the LLC (which is a hybrid entity somewhere between a corporation and a partnership) was created to allow an easier and less formal platform to operate a business, Subchapter V is somewhere between Chapter 11 (Big Business Reorganization) and Chapter 13 (Individual Debtor Reorganization) allowing for a simpler and less formal path to relief from creditors and debilitating debt.
The CARES Act expanded the relief of the Act by greatly expanding the class of Small Businesses that can now take advantage of the Act’s benefits for a year (Feb 2020 – Jan 2021). If a small business has aggregate debts of less than $7,500,000.00 (seven million five-hundred dollars), which is made up of primarily commercial debts (not personal consumer debts like cars, boats), then it could seek to take advantage of the Act.
Subchapter V cuts down on numerous complications such as creditor committees, disclosure statements, impaired class votes, certain administrative claims, and coerced, creditor filed plans, making it much more attractive to small businesses in trouble. The elimination of these processes allows for a streamlined case and a significantly lower cost.
If your small business is experiencing creditor pressure that may impair its ability to operate and rebound, you may want to speak to us about the costs and benefits of this new lifeline of relief.