The Small Business Reorganization Act of 2019 (the “SBRA”) was passed last year and intended to create a more favorable route for small businesses to use the bankruptcy protections available under Chapter 11. It includes a streamlined path for a business, or for an individual operating a business or operating as a business, to go through chapter 11 and receive a discharge. Before this act, small businesses could not benefit as much from chapter 11, and this led to many liquidations and closures. The intent of the SBRA is to help small businesses survive through bankruptcy.
Which Businesses Generally Qualify For The SBRA?
The SBRA introduced a new subchapter V to Chapter 11, which created a new definition for small business debtor. According to the new definition, a small business debtor must still be engaged in commercial business but only needs 50% or more of its debt to arise from that commercial business. The SBRA still excludes single asset real estate entities from qualifying. It also excludes any public companies.
What Are The Provisions Set Forth In The SBRA?
The SBRA created big changes to help small businesses, including an increase in the speed of cases. The debtor must file a plan within 90 days of the petition date. In addition to the increased efficiency, there is also increased authority for the debtor: only the debtor may file a plan. Under the SBRA, there are no competing plans allowed by creditors. Additionally, the SBRA eliminates the absolute priority rule, which divided creditors into classes, and unless the class above was paid in full, the class below would receive nothing. Equity owners (which includes business owners) were at the bottom. The business owners would often get nothing coming out of bankruptcy. Unless those owners paid every creditor in full, they did not get to keep their equity. The SBRA gives business owners a much better chance to keep their equity. Also, there is now an appointment of a trustee in subchapter V cases whose purpose is to help the debtor create and negotiate a consensual plan. Last, there is no quarterly US trustee or bankruptcy administrative fee, so the debtor won’t have to deal with those payments anymore.
How Does The SBRA Strike A Balance Between Chapter 7 And Chapter 11 Bankruptcies For Small Businesses?
What the SBRA really does is provide an avenue for small business debtors to avoid chapter 7 and use chapter 11, whereas before, those small businesses were not really able to use chapter 11 due to all of its costs and challenges. Before the SBRA, small business debtors would often struggle to survive through chapter 11.
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