The New, Streamlined Chapter 11 Bankruptcy Case — Part 2: Nine Significant Benefits of the Small Business Reorganization Act of 2019

In my last post, I discussed the new Small Business Reorganization Act of 2019 (“SBRA”), which will allow a small business debtor to reorganize in a streamlined chapter 11 bankruptcy case.  The SBRA offers the following benefits to the debtor:

 

  • Like a chapter 13 debtor, the SBRA debtor does not need to solicit votes from creditors to support its plan, which will reduce fees and aggravation.

 

  • Unless the bankruptcy court orders otherwise, the SBRA case will not have a creditors’ committee.  Because the debtor-in-bankruptcy is typically responsible for the fees of the creditors’ committee’s attorneys and accountants, as well as the debtor’s own professional fees, no committee means less expense for the debtor.

 

  • The bankruptcy court can confirm the SBRA plan over the objections of creditors provided that the plan does not “discriminate unfairly,” and is “fair and equitable,” with respect to each class of impaired claims or interests that have not accepted the plan.

 

  • The SBRA eliminates the “absolute priority rule” and permits a shareholder to retain ownership of the debtor business without the need to pay unsecured creditors more through the plan than the business’s projected disposable income (and the plan must not discriminate unfairly, and must be fair and equitable).

 

  • Like a chapter 13 trustee, the SBRA trustee would collect periodic payments from the debtor and make cash distributions to creditors, but cannot sell the debtor’s assets (in contrast, a chapter 7 trustee may sell the debtor’s non-exempt assets to pay creditors).

 

  • Unlike a chapter 13 plan, the SBRA plan can modify the rights of a creditor whose claim is secured only by the debtor’s primary residence, provided that the underlying loan was used primarily in connection with the debtor’s small business and not primarily to acquire that property.  This provision may allow the debtor to strip down a partially secured mortgage on his primary residence and discharge the balance of the loan.

 

  • “Means testing” under Bankruptcy Code section 707(b)(2) does not apply to the SBRA debtor.

 

  • In a typical chapter 11 case, administrative priority claims (such as trade debts or professional fees arising during a bankruptcy case) must be paid, in full, on the plan’s effective date.  In the SBRA case, an administrative claim can be paid over time through the plan.  This can help the cash-flow-challenged debtor to avoid a default on the first day of its reorganization.  In addition, the payment of an administrative claim through the plan may reduce payments to other creditors.

 

  • Unless the bankruptcy court orders otherwise, the SBRA debtor can avoid filing a disclosure statement, which will save it considerable time and professional fees.

 

As debtors’ attorneys discover the benefits of the SBRA, small business chapter 11 bankruptcy filings likely will increase.  As a result, creditors should prepare for this wave of filings, understand the limits of the SBRA and take steps to protect their interests.

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