On March 27, 2020, the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) became law. In addition to providing almost $2 trillion in stimulus relief, the Act contains changes to the Small Business Reorganization Act of 2019 (SBRA) that will make it easier for small businesses to reorganize through bankruptcy. In light of the extraordinary financial strain placed on small businesses by the COVID-19 shelter-in-place orders, restrictions on travel, and social distancing, small businesses may have no choice but to consider reorganization under the SBRA.
The SBRA added a new Subchapter V to Chapter 11 of the Bankruptcy Code to provide special provisions applicable to small business bankruptcies. The CARES Act increases the debt limit provided in Subchapter V for small business bankruptcies from $2.7 million to $7.5 million. This change, when coupled with changes made by the SBRA, makes it more attractive for qualifying small businesses to use Chapter 11 to reorganize. Unless extended by Congress, the CARES Act provides a one year window for filing. Therefore, small businesses seeking to take advantage of the higher debt limit provided by the CARES Act and the SBRA’s changes will have to file within one year of March 27, 2020.
Two of the most significant changes to Subchapter V of Chapter 11 were the elimination of the “absolute priority rule” and the requirement that at least one impaired class of unsecured creditors vote in favor of the plan of reorganization. The absolute priority rule prohibits a business owner from retaining ownership of the business until all creditors are paid in full, which is not possible in most bankruptcies. This change makes a small business bankruptcy more attractive to business owners. The elimination of creditor support for the plan also makes a small business bankruptcy more attractive since it makes more owner-friendly terms possible.
Chapter 11 bankruptcies can be expensive and complicated. The SBRA makes small business bankruptcies under Chapter V quicker, easier, and more cost-effective. For example, only the debtor may file a plan of reorganization, which must be filed within 90 days. The costly disclosure statement is not required to confirm the plan. A committee of unsecured creditors will only be appointed by order of the court. A trustee will be appointed to oversee the case, but not operate the debtor’s business, and will assist the debtor to negotiate plan terms with creditors. Creditors retain many of the traditional protections under Chapter 11, and, ultimately the plan or reorganization must not discriminate unfairly and must be fair to creditors.
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