Small businesses have been given a new opportunity for a fresh start under federal bankruptcy law. If you are a business owner who is experiencing hardship during these difficult and uncertain times, then you may be eligible for immediate relief. Taking effect February 20, 2020, the Small Business Reorganization Act of 2019 has amended Chapter 11 of the existing Bankruptcy Code to provide eligible small businesses with their own special benefits in bankruptcy proceedings.
Businesses considering bankruptcy can choose to file under either Chapter 7 or Chapter 11. In a Chapter 7 bankruptcy, all of a business’s assets are liquidated in order to distribute payments to the business’s creditors. Businesses that file under Chapter 7 will not survive beyond the proceedings of their bankruptcy.
In contrast, a typical Chapter 11 bankruptcy provides businesses with an opportunity to reorganize under a court-approved plan to repay their debts over time. A reorganization can include downsizing operations to reduce expenses, renegotiating debts, and selling assets. Though a business can continue to operate somewhat normally, it relinquishes control of many of its necessary decisions during a bankruptcy proceeding. Leasing property, post-petition financing, shutting down or expanding operations, modifying contract agreements, and selling assets all become subject to court approval. Further, creditors with interest in the business’s bankruptcy estate can form a committee to make sure those interests are protected. This “creditors committee” is comprised of professionals tasked with steering the bankruptcy in a direction most beneficial to the creditors. The business filing a Chapter 11 bankruptcy is responsible for paying the committee counsel out of its own bankruptcy estate. In addition, other administrative costs add up for a business filing under Chapter 11. Filing for bankruptcy under Chapter 11 can be extremely burdensome to a small business that may not have access to the same resources as the billion-dollar corporations who frequently utilize the chapter’s protections.
Enter the Small Business Reorganization Act of 2019 (“SBRA”). The SBRA amends Chapter 11 to make filing under the chapter less expensive, less time-consuming, and less complicated for eligible small businesses. The SBRA is added to Chapter 11 under the new Subchapter V, which is titled “Small Business Debtor Reorganization.” It provides small businesses with notable benefits that are unique and separate from a standard Chapter 11 bankruptcy proceeding. First and likely most important to small business owners, a filing under the SBRA allows filers to retain ownership and management of their business over the objections of their creditors. Second, several costs are eliminated under the SBRA, including the elimination of the creditor committees, which are present under a standard Chapter 11 and are not appointed under an SBRA proceeding unless a bankruptcy court orders it after cause is found. Third, the ability to confirm a plan under the SBRA subchapter is more relaxed than a standard Chapter 11. Only the debtor (business owner) can file a reorganization plan under the SBRA proceeding, and a plan will be confirmed, even over the objections of creditors, as long as the bankruptcy court finds it fair. Lastly, the SBRA fast-tracks the bankruptcy process for small businesses by allowing a filer to submit a plan within 90 days of the initial bankruptcy filing and a maximum of 120 days – compared to within 120 days and a maximum of 180 days under the standard Chapter 11 proceeding.
These benefits and more are available only to those businesses that are eligible to file under the SBRA. To be eligible for filing under the SBRA, the filer must be engaged in commercial or business activities, of which the owning of single-asset real estate is not the primary activity, and must have no more than $7,500,000 in combined non-contingent and liquidated debt, of which 50 percent of such debt was generated from commercial and business activities. The business must also opt in in to filing under the SBRA subchapter. If a business files bankruptcy under Chapter 11 without opting into Subchapter V, the business will be placed into a standard Chapter 11 proceeding.
Including the SBRA subchapter, all bankruptcy chapters provide an immediate and automatic mechanism that blocks creditor collection actions. This “automatic stay” gives much-needed relief to the individual or business owner and is strictly enforced by bankruptcy courts against harassing creditors.
If you believe that you could take advantage of the protections and benefits provided under the Small Business Reorganization Act of 2019, or any other bankruptcy chapter, please do not hesitate to contact Attorney Paul Murphy-Ahles at (717) 975-9446 for a free consultation to discuss your options for relief.
By Aaron Scheilbelhut