The Small Business Reorganization Act, which came into effect in February 2020, significantly changes the bankruptcy process for small businesses.
Before the SBRA
Prior to the enactment of the SBRA, businesses had two primary options when filing for bankruptcy. They could file for either Chapter 7 or Chapter 11 bankruptcy. Chapter 7 bankruptcy requires the appointment of a trustee over the non-exempt assets of the debtor. The trustee is tasked with selling those assets and using the proceeds to pay creditors. This is not a good option for a business hoping to make it through bankruptcy.
On the other hand, Chapter 11 bankruptcy allows the debtor to maintain control of its assets. With oversight from a bankruptcy court, the debtor may reorganize its business and debts. The business must develop a plan to pay creditors and have that plan approved by the court. A company that has filed for Chapter 11 bankruptcy must also comply with various additional reporting and procedural requirements. While filing bankruptcy under Chapter 11 gives a business a better chance of survival, it is also more expensive, and not all companies are able to afford it.
So how does the Small Business Reorganization Act change things? Most fundamentally, the SBRA makes Chapter 11 a better and more accessible path for a business seeking to reorganize through bankruptcy.
Under the SBRA, qualifying debtors are able to retain control of their assets as in a Chapter 11 filing. As in a Chapter 7 filing, however, a trustee is appointed, albeit with different and significantly more constrained powers. The role of this trustee is not to sell the company’s assets as in Chapter 7, but rather to help guide the company as it navigates the bankruptcy process. As in Chapter 11 bankruptcy, a company filing for bankruptcy pursuant to the SBRA is required to develop a plan to pay creditors.
In general, a business with less than $2,725,625 in liquidated, non-contingent debt is eligible for reorganization under the SBRA (but note that pursuant to the CARES Act, this amount has been increased to over $7 million until March 2021).
The SBRA provides that if a business faithfully makes the payments laid out in its plan, its unsecured debts may be discharged after three to five years has elapsed. In such a scenario, the owners of the business are able to retain their interest in the business. Additionally, the SBRA eliminates some of the reporting and procedural requirements set forth in Chapter 11. This streamlines the process and makes things easier for debtors.
At its core, the SBRA was passed with the objective of making bankruptcy filings faster and cheaper for small businesses. If your family business is considering filing for bankruptcy, contact legal counsel to find out if the SBRA helps you.