The filing of a bankruptcy petition, whether under Chapter 7, 12, 13, or 11, provides a second chance for most individuals and companies. In some circumstances, it may be appropriate to liquidate your company’s assets, and in other circumstances, such as when opportunities to grow a business still exist, it may be appropriate to reorganize the company’s debts into affordable payments made over time. Bankruptcy is not a death sentence; it is merely a safety net for individuals that dreamed big and fell hard. It’s a solution for ambitious companies, big or small, that took a chance and had bad luck. In 2020, filing for bankruptcy may just become the “new normal”.
On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Securities Act (“CARES Act”), a $2 trillion-dollar economic stimulus bill to provide relief to individuals and entities adversely impacted by the world-pandemic causing COVID-19. The CARES Act provides for numerous ways small businesses can apply and obtain emergency financing through grants and loans to cover expenses such as payroll, rent, mortgage payments, employee benefits, and utilities. More information regarding these benefits can be found here https://www.bergersingerman.com/news-insights/covid-19-legal-insights.
However, many small businesses may not find this relief enough to balance the financial burdens it’s mounting by the pandemic. These small businesses may still find hope in the Small Business Reorganization Act of 2019, Pub. L. No. 116-54 (2019) (the “SBRA”) which was signed by President Donald Trump on August 23, 2019, enacting new relief for eligible businesses. Subchapter V of Chapter 11 of the Bankruptcy Code for the reorganization of small business debtors helps to streamline the process to reorganize and rehabilitate financial affairs.
The SBRA was passed to improve the current Chapter 11 laws, making it easier for small businesses to take advantage of reorganizing their affairs by filing a chapter 11 bankruptcy. The SBRA originally allowed for small businesses with debts of $2.8 million or less to reorganize their debts without having to jump through many of the burdensome and costly hoops of a normal reorganization under the Bankruptcy Code. The CARES Act makes the SBRA more inclusive by increasing the aggregate debt cap from $2.8 million- to $7.5 million dollars to help protect small businesses that have been adversely affected by COVID-19.
Small businesses with business debt of up to $7.5 million can now take advantage of the streamlined and reduced cost reorganization process provided under the SBRA.
How does the SBRA work?
Small Business Trustees:
Although a business may continue to operate after filing a petition, the SBRA provides for the appointment of a trustee to administer and oversee the case. However, the trustee’s powers under the SBRA are significantly less than those of a Chapter 7 Trustee, as they will not obtain possession of the debtor’s assets or have the ability to sell a debtor’s assets.
Creditor Committees:
The SBRA limits the ability of creditors to form a creditors’ committee. These committees, which can be useful in larger reorganizations, can cause significant hurdles in a small debtor’s reorganization process and can be costly to the debtor, who is ordinarily required to pay all the committee’s expenses.
Streamlined Plan Process:
The SBRA streamlines the debtor’s ability to confirm a Chapter 11 plan by 1) eliminating the need to file a disclosure statement, 2) allowing plans to be confirmed without the vote of an unimpaired class, 3) eliminating the Absolute Priority Rule, and 4) permitting administrative claims to be paid overtime. Additionally, the SBRA permits a debtor to modify loans on his or her principal residence, if the loan proceeds are used to finances the debtor’s business.
Discharge:
The SBRA allows small businesses to obtain a discharge either at confirmation or upon completion of its plan payments. It’s crucial for small business owners to be well-informed of the SBRA as it could provide many companies with an equitable second chance.
Creditors should be mindful of the changes under the SBRA. As discussed above, it streamlines the reorganization process and eliminates obstacles. Lenders should not be blindsided by these changes, particularly, those changes related to the modification of certain loans and the treatment of post-petition financing. Lenders should seek counsel early to understand their rights upon a borrower’s filing.
Small business owners currently experiencing financial difficulties due to the pandemic, should use this time to learn more about the options to protect your business. The increased debt cap for the SBRA under the CARE Act, along with the other relief provided in the federal aid package is only intended to be in effect for one year. Bankruptcy may not be the answer for some this time and other options may be available, but it’s important to be educated and advised by knowledgeable counsel when planning a business’s future in this new financial landscape.
If you have any questions regarding the SBRA or your company is having financial difficulties, you can reach Michael Niles directly at mniles@bergersingerman.com or 850-561-3010.
