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A New Bankruptcy Reorganization Option for Small Businesses

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The Small Business Reorganization Act of 2019 (“SBRA”) became effective February 19, 2020.

The goal of the Act was to streamline the Chapter 11 process and reduce the costs for those debtors that qualify. Small businesses who are facing cash flow issues due to the financial impacts of the Covid-19 Virus are ideal candidates for SBRA. Instead of risking the complete failure of their business, owners can plan for a restructuring of their debts and pay a certain percentage on the dollar to their general unsecured creditors. As a little background, a traditional Chapter 11 is still available for individuals and corporations with its various requirements such as obtaining first day orders, seeking use of cash collateral, assuming or rejecting leases, filing monthly operating reports, filing a disclosure statement, filing a plan of reorganization, soliciting votes from creditors and then seeking court confirmation of the Chapter 11 Plan. The entire process can take over a year and can costs thousands of dollars each month in administrative costs.

To be an eligible small business debtor the SBRA requires at least 50% of small business debtor’s debts to have arisen from commercial or business activities.

A “small business debtor” is defined as one that has aggregate, noncontingent, liquidated, secured and unsecured debts of $2,725,625 or less (NOTE THAT THIS AMOUNT WAS INCREASED TO $7,500,000 PER THE CARE ACT). That amount adjusts periodically.

Here are some key features of SBRA that will reduce the time and costs to be in Chapter 11:

  • Mandatory status conference will occur not later than 60 days after the case is filed. Extensions will be hard to obtain. Debtor must file a pre-conference status report at least 14 days before status conference. The report will detail the “efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization”.
  • A standing trustee will be appointed. The trustee will serve until substantial consummation of the plan if confirmation is consensual. If confirmation is contested, the trustee will serve until completion of payments under the confirmed plan. The trustee will make all payments to creditors under the confirmed plan and will make adequate protection payments to secured creditors prior to confirmation. The trustee will appear at the mandatory status conference, facilitate the development of a consensual plan of reorganization, and perform general duties like a Chapter 13 trustee.
  • No quarterly US Trustee fees.
  • No creditor committees.
  • No disclosure statements.
  • Absolute priority rule will not apply.
  • Only a debtor will be able to file a plan. The plan must be filed no more than 90 days after the entry of order for relief. Extensions of time will be hard to obtain.
  • For individual debtors, a debtor can modify the rights of holders of claims secured by debtor’s principal residence if the debt was not used primarily to acquire that real property and the debt was used primarily in connection with debtor’s business.
  • No consenting impaired class needed for confirmation so long as certain requirements are met and the plan does not discriminate unfairly and is fair and equitable as to each impaired, nonconsenting class. A plan is “fair and equitable” as long as it meets certain requirements, including, providing for application of all of debtor’s projected disposable income for 3 years beginning on the date first plan payment is due and debtor will be able to make all plan payments.

Call David A. Arietta at (925) 472-8000 to review options. It is best to analyze options early in the process before cash flow problems become worse. A small business must have an overall “game plan” before filing for Chapter 11 bankruptcy relief.