On August 23, 2019, Congress passed the Small Business Reorganization Act of 2019 (SBRA),
which became effective in February 2020; adding a new Subchapter V to Chapter 11 of the U.S. Bankruptcy Code, entitled “Small Business Debtor Reorganization.” What is most significant about the additional subchapter added under the SBRA is that its purpose is to allow small businesses the opportunity to reorganize their debt in a less complex, and possibly affordable, version of a chapter 11 bankruptcy.
In light of recent stay-at-home orders issued in response to the Covid-19 pandemic, the timing of the SBRA could not have been more convenient for our beloved mom and pop shops who were forced to lay off employees and close their doors to the public.
Traditionally, a struggling small business had two options—a chapter 7, allowing a trustee to liquidate the business’ non-exempt assets; or a chapter 11, allowing the business to conform to a reorganization plan, but with increased oversight, high administrative costs, long delays, and higher upfront attorney retainers. With the SBRA, mom and pop shops have a chance to reorganize their debt in less time than in the traditional chapter 11 case; in effect, providing them a more affordable chapter 11.
What makes the subchapter V case for small business owners more affordable than the traditional chapter 11 is that the SBRA eliminates, as well as adds, certain procedural chapter 11 requirements. Thereby, making small business chapter 11, subchapter V, cases more time-efficient and, effectively, cost-efficient for all parties involved. Some examples are:
A subchapter V trustee is appointed to the case, serving a role that is similar to a chapter 13 trustee, by ensuring payments are made by the debtor and disbursed to the creditors according to the debtor’s plan, over the course of 3 to 5 years.
Within 60 days from the debtor’s bankruptcy case filing, a status conference is held with the goal of expediting the case and determining the best course of action to facilitate the case. In addition, the debtor is required to file and serve a report 14 days before the status conference, detailing the efforts the debtor has taken to formulate a plan of reorganization that will be agreeable for the parties in interest.
The debtor’s plan of reorganization is due within 90 days from bankruptcy filing. Whereas, under a traditional 11, the plan is due 120 days from filing, which is oftentimes continued.
Unlike a traditional chapter 11 case, a disclosure statement is not required to be filed and approved under a subchapter V case, unless the court orders otherwise.
These additions to Chapter 11 of the U.S. Bankruptcy Code are just a few changes that can go a long way toward allowing a small business debtor to reorganize its debt under a chapter 11 case, in a time-efficient and affordable way. If you are a small business owner and are considering bankruptcy, but not sure which chapter is right for you, it is best to speak with a bankruptcy attorney first.
Contact this office to schedule a consultation.
Michelle Patterson Law
p: (619) 630-5282
e: michelle@michellepattersonlaw.com
www.michellepattersonlaw.com