Filing for bankruptcy is expensive and time consuming. The Small Business Reorganization Act of 2019, which went into effect on February 19, 2020, makes everything a lot easier for companies in financial distress. Also known as Subchapter V, this new law eliminates some of the most complex elements of traditional Chapter 11 relief. From now on, debtors who owe less than $2,725,625 will enjoy more favorable conditions when declaring bankruptcy.
TL;DR (Too Long; Didn't Read)
The Small Business Reorganization Act is designed to make small-business bankruptcies quicker and less expensive. It will reduce unnecessary procedural burdens and give debtors time to make a sound reorganization plan.
Small Business Reorganization Act of 2019
Small businesses are often forced to file for bankruptcy after running out of cash or failing to adapt to the market. Poor leadership, unexpected growth and a vague understanding of the marketplace play a role too. According to a recent survey, less than one-third of small-business owners are insured against lawsuits and incidents that may lead to bankruptcy. Furthermore, only 27% of companies that filed Chapter 11 bankruptcy between 2008 and 2015 had a reorganization plan.
The Small Business Reorganization Act, or SBRA, is designed to streamline the bankruptcy process for small-business debtors. Basically, it creates a new subchapter under Chapter 11, which traditionally involved complex business reorganizations for companies declaring bankruptcy. Its role is to help small businesses owing less than $2.7 million to reorganize their debts. Those who find themselves in this situation will be able to negotiate with creditors and find a solution that benefits both parties.
Chapter 11 bankruptcy has long been considered one of the most complex bankruptcy cases. Debtors were required to reorganize their business operations and figure out a repayment plan under the supervision of the court. Most times, they continued to run the business as usual but were forced to lay off staff or downsize their operations. The new act, or Subchapter V, will simplify these procedures for small-business owners, helping them stay afloat and retain control of the company.
Key Provisions of the SBRA
The Small Business Reorganization Act was signed by President Trump on August 23, 2019, and it became effective on February 19, 2020. Its role is to make small-business bankruptcies quicker and less expensive. There's a catch, though — the new Subchapter V only applies to debtors who owe no more than $2,725,625 in secured and unsecured debt and need to resort to the Chapter 11 bankruptcy process to pay off creditors. At least half of a company's debt must have arisen from commercial or business activities.
Traditionally, Chapter 11 bankruptcy was largely used by public companies and large businesses, such as Barneys New York Inc. and General Motors. Under this law, small-business owners had a difficult time successfully reorganizing. They were unable to retain ownership of the company without paying off debt unless creditors' committees accepted their plans. The new act allows debtors to retain ownership of the business without paying unsecured creditors in full.
Be aware that Subchapter V doesn't include contingent debt in the total debt amount. Additionally, debtors are required to file a plan of reorganization for the next three to five years, which must include a brief history of the company and financial projections that prove its ability to pay. It’s not required to file a disclosure statement, but you must submit a liquidation analysis, cash flow statements and other documents. The plan must be submitted to the court within 90 days of the petition date.
Under the Small Business Reorganization Act of 2019, only the debtor may file a plan. Like in Chapter 13 cases, which involve individuals, the bankruptcy court will then appoint a standing trustee to help the debtor reorganize the business and pay off debt. Creditors' committees are not a requirement anymore unless the court orders otherwise. Furthermore, debtors can go ahead with their reorganization plan without having creditors vote to accept it.
Does Your Small Business Qualify?
Except for single-asset real estate debtors, any small business with less than $2.7 million in debts can file a plan of reorganization under the new act. What qualifies as a small business? Size standards depend on the industry, economic characteristics and number of employees. Generally, U.S. small businesses should meet the following criteria:
- Are organized for profit
- Are independently owned and operated
- Are not dominant in their field on a national basis
- Operate primarily in the U.S.
Any company that meets these criteria, whether it's a partnership, LLC, sole proprietorship or corporation, qualifies as a small business. As you would expect, nonprofits don't fall into this category.
The SBRA and Your Business
Chapter V is a game changer for small-business owners. It not only reduces the expenses associated with bankruptcy but also makes it easier to file and confirm a reorganization plan. Perhaps one of its primary advantages is that small-business debtors no longer have to deal with a committee of unsecured creditors. These committees often came with their own lawyers and increased the cost of the process.
So, what does it mean for your business? If, say, you decide to file for bankruptcy, you no longer have to worry about losing your assets unless the creditors are paid in full. This gives you enough time to make a plan of reorganization and continue with your expansion plans if that's what you want. As long as your plan is fair and equitable, it will most likely be approved.
Your expenses will be significantly lower too. The Small Business Reorganization Act allows for delayed payment of administrative expense claims. Additionally, it's no longer required to assign new values to equity interest. These measures give small-business owners a chance to reorganize and survive rather than close their doors.
Another advantage is that creditors won't be able to take away a debtor's home as easily as they once did. Chapter V benefits sole proprietors and other individual small-business debtors in this regard. As a debtor, you will have the right to modify certain residential mortgages to get lower interest rates. This was not possible prior to the act.
Are There Any Drawbacks?
The Small Business Reorganization Act of 2019 is designed to simplify Chapter 11 bankruptcy. However, it still leaves many questions unanswered and may not work for everyone. For example, it's unclear what happens to the interest rate on secured loans. Will it stay the same or increase during the reorganization plan?
Also, it's hard to tell what would happen to small-business owners who filed Chapter 11 in 2019 but haven't had a plan confirmed. Will they be able to proceed under Chapter V? Debtors may also have a difficult time deciding whether they should opt for a three-year or a five-year plan, as it depends on the projected cash flow and how much equity they are trying to save. For example, if they decide on a three-year plan and their revenue decreases, they may need a longer period to pay.
All in all, Chapter V is likely to have a major impact on small-business bankruptcies. As with any new law, only time will tell how it turns out. These provisions favor small-business debtors by reducing unnecessary procedural burdens and increasing their ability to negotiate with creditors. Consider reaching out to a lawyer to discuss your options and gain a better understanding of the SBRA.
- Insureon: Majority of Small Businesses Lack Basic Business Bankruptcy Protection
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- Chuck Grassley, United States Senator for Iowa: The Small Business Reorganization Act
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- United States Bankruptcy Court Northern District of Florida: A Guide to the Small Business Reorganization Act of 2019
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- Administrative Office of the U.S. Courts. "Chapter 7 - Bankruptcy Basics." Accessed May 19, 2020.
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- U.S. Department of Justice. "U.S. Trustee Program Ready to Implement the Small Business Reorganization Act of 2019." Accessed May 19, 2020.
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- U.S. Securities and Exchange Commission. "Bankruptcy: What Happens When Public Companies Go Bankrupt." Accessed May 14, 2020.
Andra Picincu is a digital marketing consultant with over 10 years of experience. She works closely with small businesses and large organizations alike to help them grow and increase brand awareness. She holds a BA in Marketing and International Business and a BA in Psychology. Over the past decade, she has turned her passion for marketing and writing into a successful business with an international audience. Current and former clients include The HOTH, Bisnode Sverige, Nutracelle, CLICK - The Coffee Lover's Protein Drink, InstaCuppa, Marketgoo, GoHarvey, Internet Brands, and more. In her daily life, Ms. Picincu provides digital marketing consulting and copywriting services. Her goal is to help businesses understand and reach their target audience in new, creative ways.