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The New Small Business Reorganization Act

John Redfield Jan. 8, 2020

In a hope to streamline the bankruptcy process for insolvent small businesses and rehabilitate their financial affairs under Chapter 11 bankruptcy, Congress enacted the Small Business Reorganization Act of 2019. This act will go into effect on February 19, 2020. The act contains a new subchapter V for Chapter 11 small business debtors, which allows the debtor to elect for this subchapter and its provisions to apply. The Act provides a number of important changes that benefit both debtors and creditors alike and streamlines the Chapter 11 bankruptcy process for small businesses.

Eligibility for Chapter 11 Bankruptcy

Chapter 11 reorganization is only available for companies with secured and unsecured debts of $2,725,625 or less. Only the small business can file a Chapter 11 plan. This plan must be filed within 90 days of the filing of the bankruptcy petition, unless special circumstances apply. Once the plan is filed, a standing trustee is appointed to oversee the case.

Beneficial Changes for Debtors
A case under the Small Business Reorganization Act should be quicker and less expensive than a typical Chapter 11 case under the new provisions. Historically, many small business debtors have not been able to obtain the benefits of Chapter 11 reorganization because of the costs and administrative burdens associated with this bankruptcy plan. The Act seeks to remove many of these obstacles to make Chapter 11 filings more beneficial to creditors. Some of the beneficial changes for debtors include:

  • The Act streamlines the reorganization process. Many of the procedural requirements and costs associated with them have been removed.

  • There are more debtor-friendly provisions. A loan secured by the debtor’s principal residence may be modified under the plan if the loan proceeds were used for the benefit of the small business.

  • Having the plan approved is easier. The court can confirm a debtor’s plan without the support of any class of claims so long as the plan is not discriminatory and is considered fair and equitable, which is defined as providing all of the debtor’s projected disposable income during the plan toward payments under the plan for three to five years.

  • A creditors’ committee will not be formed.

  • Administrative expense claims payments can be delayed.

  • Debtors can make payments toward administrative expense claims during the term of the plan instead of having to pay them upfront.

Beneficial Changes for Creditors
Most notably, the Act makes changes to existing preference laws that many creditors will appreciate. Under current provisions, debtors and trustees have broad authority to recover preferential transfers that were made 90 days before the bankruptcy case was filed. This lawsuit would have to be filed in the federal district where the defendant resides if the transfer was less than $13,650. The new provisions raise the threshold to $25,000 and imposes an additional requirement that the debtor exercise reasonable due diligence and consider the creditor’s possible affirmative defenses. These changes may minimize the number of such preferential suits.

Another beneficial change for creditors is that there are more exceptions to discharge than under a typical corporate Chapter 11 case.