Posts Tagged ‘small business debtor’

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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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.