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Hot Topic: The Small Business Reorganization Act

Oren D. Saltzman, Esq.

In the past, when small business clients sought my advice as to how they could stay in business while reorganizing themselves because of debts they could no longer tolerate, it was very difficult to provide them with good alternatives to either a Chapter 7 liquidation or a Chapter 11 reorganization.  Most times business clients were not interested in going out of business and liquidating their assets or filing for a Chapter 11 bankruptcy petition, which can be very expensive and ultimately lead to liquidation in any case.

In 2019 Congress enacted the Small Business Reorganization Act of 2019, effective February 20, 2020 (“SBRA”). The SBRA, as originally enacted, limited non-contingent debtor debt to no more than $2,725,625.  The CARES Act of 2020 amended the SBRA by increasing the non-contingent debt maximum to $7.5 million.  The CARES Act amendment sunsets on March 27, 2021.  SBRA is located in Subchapter 5 of Chapter 11 of the U.S. Bankruptcy Code.  Its purpose is to give relief to small businesses and contains a number of provisions which are much more advantageous than either Chapter 7 or Chapter 11 of the Bankruptcy Code. It is a hybrid as it contains parts of both of these bankruptcy provisions.

In order to file a Subchapter 5 petition, the debtor must be a “small business debtor,” i.e., again,  a debtor who has less than $7.5 million in debt.  A trustee is appointed to the case to oversee the bankruptcy, but the trustee does not take control of the bankruptcy estate.  Instead, the debtor may remain a “debtor in possession” retaining authority to operate the business while the trustee performs oversight functions, including the administration of payments under a Plan.

A Plan must be developed by the debtor in possession and submitted to the court for approval, but unlike the case with a Chapter 11, creditors may not file their own Plans with the court.  The debtor has the exclusive right to file a Plan within 90 days from the date the petition for bankruptcy is filed. In a Subchapter 5 bankruptcy, no creditors committee is appointed unless the court orders a committee for cause.

Another advantage of a Subchapter 5 bankruptcy over a Chapter 11 bankruptcy is that no disclosure statements are required to be filed, although the Plan must include information usually found in a disclosure statement, such as a summary of historical operations, liquidation analysis and projections demonstrating an ability to make payments under the Plan.  Moreover, owners may retain equity even if not all creditors are paid in full.  The Plan may be confirmed over the objection of one or more impaired classes of creditors as long as the debtor can demonstrate that the Plan is fair and equitable, does not unfairly discriminate, and provides for the debtor’s contribution of all of its projected disposable income.

If the Plan is confirmed with the consent of all affected creditors, the debtor will receive a discharge of its debts at confirmation.  Plans confirmed without approval of all affected creditors will receive a discharge when all the payments called for under the Plan are made.   Subchapter 5 authorizes a small business debtor to modify a residential real estate mortgage to the extent that the proceeds from the loan were used in the business.  This relief is new and is not allowed in either a Chapter 7 or a Chapter 11 Bankruptcy.

The creation of Subchapter 5 of the Bankruptcy Code provides small business owners with a new mechanism to deal with business problems in a way never previously available to them.  It gives me a way to advise clients who need relief from a debt burden while still remaining in business.  Particularly in today’s economic climate Subchapter 5 of the Bankruptcy Code is a good addition to the tools available to small business owners.

Oren Saltzman represents small, medium, and large privately-held, family-owned businesses in a variety of areas. He can be reached at 410-986-0864 or osaltzman@adelberg.com.

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