Congress Opens the Door for More Chapter 11 Filings Under the Recently Enacted Small Business Reorganization Act
As the novel coronavirus continues to cause large scale disruptions in the U.S. economy, large and small companies alike are preparing for the worst and seeking solutions to weather the financial crisis caused by the COVID-19 pandemic. Fortunately, on March 27, 2020, Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act”) which includes a number of emergency relief packages designed to alleviate the financial burdens currently encountered by U.S taxpayers and businesses.
Among the various relief provisions of the CARES Act is an important revision to the Bankruptcy Code specifically designed to allow more businesses to obtain relief under the new subchapter of Chapter 11 enacted by The Small Business Reorganization Act of 2019 (“SBRA”), which law went into effect on February 19, 2020.
The SBRA was enacted to address a number of Bankruptcy Code provisions and procedures which oftentimes made it difficult for small businesses to reorganize their financial affairs. Prior to the enactment of the SBRA, small businesses often struggled to successfully reorganize due to several costly and cumbersome requirements under the traditional provisions of Chapter 11, including the requirement that debtors obtain approval of a disclosure statement and solicit acceptances of their plan from various creditors.
The SBRA attempts to alleviate these burdensome aspects of Chapter 11 and streamline the process by which a small business debtor with no more than $2,725,625 in secured and unsecured debt reorganizes and rehabilitates its financial affairs. Now under the SBRA, debtors are no longer required to submit a disclosure statement and solicit acceptances of their plan from creditors, making the Chapter 11 plan confirmation process cheaper, manageable, and more likely to succeed.
The SBRA also makes the Chapter 11 process more predictable by allowing existing business owners to retain their equity interests in their business over the objection of unsecured creditors, provided the debtor’s disposable income is committed to pay creditors over a period of three to five years. Prior to the enactment of the SBRA, business owners faced great uncertainty and the potential risk that their equity interests would be lost during the course of the Chapter 11 process if unsecured creditors were dissatisfied with the treatment they were receiving under a Chapter 11 plan. Now, business owners know before they even enter the Chapter 11 process what may be required to retain their equity interests, making the decision to pursue Chapter 11 relief a bit more palatable for business owners faced with a dire financial situation like we have at present.
Since it could be expected that many shuttered businesses would turn to U.S. Bankruptcy law for relief during this unprecedented time, Congress included an increase of the maximum debt threshold for relief under the new SBRA provisions from $2,725,625 to $7,500,000 in the CARES Act to ensure a greater number of small businesses will be able to take advantage of the new efficient and cost effective Chapter 11 provisions of the Bankruptcy Code. After one year, however, the debt threshold increase included in the CARES Act sunsets and returns to $2,725,625. Thus, businesses with debts exceeding $2,725,625 should carefully consider whether a restructuring under the new SBRA provisions will aid their survival in a post-coronavirus environment, as the ultimate success of a small business reorganization may depend on the extent to which a debtor can avoid the costly and cumbersome procedures of a traditional Chapter 11.
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