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Home > New Bankruptcy Law is a Game Changer for Small Businesses Facing Financial Hardship

New Bankruptcy Law is a Game Changer for Small Businesses Facing Financial Hardship

By: Leo M. Gibbons, Esq.

The Small Business Reorganization Act (“SBRA”) codified amendments to the Bankruptcy Code and went into effect on February 19, 2020.  Prior to these amendments, small businesses attempting to reorganize under Chapter 11 of the Bankruptcy Code regularly faced tremendous hurdles in confirming a plan of reorganization and, if successfully confirming a plan, seeing that plan to completion.  These obstacles included the large expenses associated with Chapter 11 cases, the legal requirements imposed upon the reorganizing debtor under the bankruptcy laws and an often adversarial relationship between the reorganizing debtor and the unsecured creditors committee and/or the United States Trustee.

The amendments governing small business debtors are found in Subchapter V of the Code and serve to reduce the obstacles faced by small businesses attempting to reorganize.  These amendments are designed to reduce the time and cost of reorganization for small businesses, ease the burden of compliance, create a relationship with the case trustee that is more conducive to obtaining a consensual plan of reorganization, and provide the reorganizing debtor with new tools to deal with unsecured creditors. All of these changes should allow small business debtors to confirm more workable plans and successfully complete a reorganization.

Originally, the cap for filing as a small business debtor under Subchapter V was $2,725,625, at least 50% of which must have arisen from commercial or business activity.  Significantly, insider debt (essentially debt owed to the owner) is not counted towards the cap.  Under the recently passed CARES Act, the cap was raised to $7.5 million for cases filed on or before March 27, 2021, which will allow many more debt burdened small businesses to take advantage of the benefits of Subchapter V.

In the next few weeks, we will publish a companion article highlighting some of the more significant changes in Subchapter V.  These changes will illustrate how this new subchapter gives qualifying small businesses new tools for managing debt and creditors, and reorganizing under the bankruptcy laws.