Law Offices of Nicholas Gebelt

Before The Small Business Reorganization Act Of 2020, What Were The Only Real Options For Struggling Businesses Considering Bankruptcy? Why Was This Not Enough?

A business could file under Chapter 7, meaning that it was going out of business. All of its assets were liquidated for the benefit of the creditors, and the business ceased to exist. The other option was doing a business reorganization under Chapter 11. My answer to the previous question discussed some of the problems in a standard Chapter 11. These included the requirement that there be at least one consenting class, or else the plan couldn’t be confirmed; the absolute priority rule in the absence of unanimity of class acceptance of the plan; and the possibility of facing a plan propounded by a creditor.

The Small Business Reorganization Act (“SBRA”) — Subchapter V of Chapter 11 — was enacted to remove those difficulties, make it possible for a small business to reorganize in a relatively short time, and avoid these and other problems. In a sense, SBRA took some features of Chapters 12 and 13 and grafted them onto Chapter 11.

A business cannot file under chapter 13. That’s only for individuals and legally married couples. And a business doesn’t typically file under chapter 12 unless it is a family farmer or fishing operations.

Which Businesses Qualify For The Small Business Reorganization Act?

The business has to be a small business as defined in the statute. A key requirement is that its total debt cannot be more than $2,725,625 – with some qualifying language. (This was temporarily increased to $7. 5 million due to the pandemic crisis, but it will soon revert back to $2,725,625. ) If the business’s debts are less than debt ceiling, it is a small business that could conceivably file under Subchapter V.

How Does The Small Business Reorganization Act Better Enable Small Businesses To Survive Bankruptcy And Retain Control Of Its Operations?

Two key things are:

  • The Subchapter V plan does not have to be a consensual plan. That means the business can get its plan confirmed even if none of the creditors vote in favor of confirmation.
  • There is no absolute priority rule, which means even if the confirmed plan is nonconsensual, the business owner doesn’t lose ownership of the business.

This makes it possible for a small business to have good chance of succeeding as it marches into the future.

Is Filing Now Under The Small Business Reorganization Act The Best Option For Every Small Business That’s Looking To File Bankruptcy?

If a small business is looking to file under Chapter 11 and it really is a small business as defined in the Bankruptcy Code describes, then Subchapter V can be a very good choice.

The one drawback I mentioned a little bit earlier is the Subchapter V Trustee, who must be paid. If the plan is not a consensual plan, that Trustee stays on for the life of the plan, which can be years.

However, if it looks like the plan can be consensual, meaning that the classes will all vote in favor of plan confirmation, then it’s probably best to do a Subchapter V under the Small Business Reorganization Act, rather than a standard Chapter 11.

Of course, if the business total debt exceeds the statutory debt ceiling, Subchapter V is unavailable. Therefore, it may make sense to pay down some of debt before filing, and then wait a long enough to overcome any problem with preferences. When I first meet with the small business owner, one of the things that we discuss is the appropriateness of filing under the Small Business Reorganization Act.

For more information on SBRA Law In California, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.

Attorney Nicholas Gebelt

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