The Small Business Reorganization Act of 2019 and the Covid-19 Impact
In 2019, Congress amended the U.S. Bankruptcy Code by ratifying the Small Business Reorganization Act, which just recently became effective on February 22, 2020. Chapter 11, Subchapter V the federal Bankruptcy Code was added to simplify the reorganization process for debtors with less than $2.7 million of debt by eliminating disclosure and solicitation obligations and tightening case deadlines to ensure a quick trip through the process. The Small Business Reorganization Act will provide a better path to reorganization than was previously available to small businesses. The cheaper, faster and more efficient process will allow small businesses that previously couldn't have financed a Chapter 11 bankruptcy case to have a better chance to emerge. These new rules should help smaller business stay in Chapter 11 reorganization and avoid being forced to Chapter 7 liquidation due to their dwindling revenues caused by Covid-19.
Typically, in a Chapter 11 reorganization, the bankrupt company’s equity owners usually lose their equity in the reorganized company unless all of its debts are repaid in full. However, under the new Subchapter V, business owners can keep their equity, so long as they distribute their disposable income to creditors over the next three to five years. Furthermore, under the new Subchapter V a debtor can have creditors object to a plan and still theoretically confirm a plan. Only the debtors, and not their creditors can propose a plan under the Small Business Reorganization Act. The new Small Business Reorganization Act also makes the process less costly. Typically, a creditors’ committee is a part of the Chapter 11 reorganization process. However, under Subchapter V, unless the court orders otherwise, there won’t be a creditors’ committee for unsecured creditors. This is a major cost saving part of the new law since the debtor normally has to pay the fees and expenses of professional advisors to that committee.
More recently, in late March, under the CARES Act, Congress raised the debt cap to $7.5 million in order to help additional small businesses navigate a Chapter 11 bankruptcy because of Covid-19. This higher debt cap will be in place for one year until March 27, 2021. This higher debt cap will allow more, and bigger business to take advantage of the streamlined and cheaper process created in the Small Business Reorganization Act. In order to take part in the new Small Business Reorganization Act process, a debtor must specifically elect the new Subchapter V reorganization. Additionally, a company currently in a typical Chapter 11 reorganization proceeding, that qualifies for a Subchapter proceeding, may elect to switch to the new process.