Posts Tagged ‘SBRA’

Small Business Debtors Rejoice: The New, Streamlined Chapter 11 Bankruptcy Case – Part 1

For decades, members of Congress have claimed to be the saviors of small businesses.  At the same time, Congress created obstacles for those same businesses when seeking relief from their creditors.

Case in point: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”).  BAPCPA added administrative hurdles for small businesses seeking to reorganize their finances.  In addition to the demands placed on big companies filing for bankruptcy, BAPCPA required small business debtors to file additional financial disclosures and to make an additional appearance.  Those extra demands placed considerable stress on small businesses already struggling with a diminished workforce and operational challenges.

Why did Congress make life so hard for small businesses?  Some in Congress believed that, because creditors would not invest the necessary resources to supervise the small business bankruptcy reorganization, Congress needed to implement “a variety of … enforcement mechanisms designed to weed out small business debtors who are not likely to reorganize.”  H.R. Rep. No. 109–31, at 19 (2005).  Inevitably, those enforcement tools destroyed small businesses that otherwise would have reorganized.  The collateral damage likely included lost jobs, vacant commercial space and frustrated customers, suppliers and landlords.

Fast forward to 2019.  Congress worked closely with bankruptcy experts and revamped the rules governing small business reorganizations.  The result was the Small Business Reorganization Act of 2019 (“SBRA”), codified in new subchapter V of chapter 11 of the Bankruptcy Code, which becomes effective in February 2020 and is available to business debtors with total debts up to $2,725,625.

The SBRA case borrows some features of a chapter 13 bankruptcy case.  As background, in a typical chapter 13 case, the debtor proposes a chapter 13 plan and makes monthly plan payments to the chapter 13 trustee.  If the chapter 13 plan commits all of the debtor’s disposable income for the plan’s 3 to 5 year term to pay unsecured creditors, the bankruptcy court can confirm the plan over the objections of creditors and the trustee.

In contrast, in a typical, non-SBRA chapter 11 bankruptcy case, the plan proponent (often, the debtor) must solicit votes from creditors to accept the chapter 11 plan.  The bankruptcy court cannot confirm a non-SBRA chapter 11 plan unless at least one class of impaired claims votes to accept the plan (an impaired claim is a claim that, under the plan, will not be satisfied in accordance with the contract terms).  Plan acceptance requires the affirmative vote of creditors holding at least two-thirds in dollar amount and more than one-half in number of allowed claims in that class.  Attorneys can spend many hours trying to gather votes from creditors, only to come up short when a creditor demands more, or does not return a telephone call, or is too large or too busy to keep track of balloting forms.

In my next post, I will share nine significant benefits that the SBRA offers to the small business debtor as an alternative to a traditional chapter 11 or chapter 13 case.

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