There are several ways the SBRA helps small businesses survive bankruptcy and retain control of their operations. The SBRA got rid of the “absolute priority rule,” ensuring that the business owner has a better possibility of keeping his or her equity. Now, assuming the debtor pays all of its projected disposable income, the equity holders are entitled to keep their equity and ownership. This gives small business owners a chance to enter bankruptcy, restructure their debt, and keep their equity. That chance was not there before SBRA.
Another way the SBRA helps small business is by establishing a shorter time period for filing a plan, and allowing only the debtor to file a plan. The debtor must file a plan within 90 days of the petition date, instead of the previous 300, and there are much fewer costs that can be incurred in 90 days. There can be no competing plan filed by a creditor. Another great help provided by the SBRA is the elimination of creditors’ committees altogether, which greatly reduces expenses for small businesses.
Before the SBRA, What Were The Only Real Options For Struggling Businesses Considering Bankruptcy And Why Isn’t That Or Wasn’t That Enough?
Before the SBRA, chapter 11 included provisions for what is defined as a small business case or small business debtor, but with the absolute priority rule still in place, there was little incentive for a small business to go through the chapter 11 process because the owners could rarely keep their equity. Often, such businesses would just gradually die out.
Now, there is a way for owners to enter bankruptcy, receive protection, restructure existing debt, and still come out on the other side of the bankruptcy with their ownership and working business. This saves employees’ jobs, contracts with clients, and relationships with vendors.
What Are Some Of The Costs Of Chapter 11 Bankruptcies For Small Businesses And What Difficulties Were That Proving For These Small Businesses?
Before SBRA, Chapter 11 had many additional costs, including quarterly trustee fees, liquidation costs, fees for creditors’ committee counsel, fees for the equity holder’s counsel, if applicable, and costs for other third parties to assist with reorganization which can sometimes take years. The combination of those costs with the costs of lawyers, accountants, and other standard costs made it almost impossible for small businesses who were already struggling to make it through a Chapter 11 bankruptcy. While legal fees still apply, the SBRA removed a majority of the other costs, giving small businesses a chance to survive.
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