Small Business Reorganization Act Allows for Easier Chapter 11 Bankruptcies for Qualified Businesses
The Small Business Reorganization Act of 2019, which takes effect this month, simplifies the process for small businesses to use bankruptcy as a means of reorganization.
Under this new subchapter of the Bankruptcy Code, businesses with less than $2.7 million in debt will be able to file for bankruptcy in a timelier and more cost-effective manner. While in bankruptcy reorganization, a small business will be able to negotiate with creditors while keeping the doors open, employees on payroll, and suppliers and vendors paid.
The act, signed into law in August by President Trump, adds a new subchapter to Chapter 11. For businesses, Chapter 11 of the Federal Bankruptcy Code has been the key to survival to reorganize debt, which preserves jobs, investments, and valuable contributors to the economy. However, Chapter 11’s terms have been poorly suited to allow businesses and their creditors to take full advantage of the relief it promises, according to Rep. Ben Cline, R-Va., who sponsored the act.
Chapter 11 is a successful tool for large corporations and businesses with many resources, including General Motors, which filed for bankruptcy in 2008 and recovered. However, Chapter 11 typically doesn’t work for small businesses, as it is the most expensive form of bankruptcy, and small businesses with limited resources cannot always recover.
To solve this problem, the Small Business Reorganization Act takes the provisions of Chapter 12, which helps small family farmers and fishermen to reorganize their enterprises when needed, as a model for small businesses. Here are a few of the act’s benefits for small business owners:
Trustee designation –
According to the law, a designated trustee is responsible for the bankruptcy estate and will manage and monitor the reorganization. Similar to Chapter 13, the trustee doesn’t run the business but instead ensures the debtor complies with laws, offers opinions on the case, and objects to claims.
An efficient process –
The act removes procedural costs and burdens typically associated with corporate reorganizations. For example, the debtor proposes the reorganization plan. Also, unless a court orders otherwise, the bankruptcy moves forward without unsecured creditors’ committees and approval of a separate disclosure statement.
Residential mortgage modification –
With specific provisions, the small business debtor may change a mortgage secured by a residence.
Administrative expense claim payment delays –
The debtor may delay payment of the administrative expenses claims by stretching payment claims out over the term of the plan.
Discharge limitations –
The court will grant the debtor a discharge after completion of all payments due within the first three to five years of the plan. The release relieves the debtor of personal liability for all debts provided; however, the debtor must meet specific requirements.