Is the Small Business Reorganization Act Right for You?
Congress enacted a new section of Chapter 11 of the Bankruptcy Code specifically for small businesses. The CARES Act increased the debt limit for 12 months. If your small business or start-up won't be saved by the 2020 stimulus, you may want to consider the Small Business Reorganization Act.
Are You Eligible as a Small Debtor?You qualify as a small business debtor if you:
• Engage in commercial or business activities other than owning single asset real estate property (single asset real estate debtors are covered in a different section of the Code).
• Do not have more than $7,500,000 in noncontingent, liquidated, secured, and unsecured debts, of which at least 50% have arisen from commercial or business activities, excluding debts owed to affiliated businesses on insiders of the company. (NOTE, the limit was originally $2,725,625 but the CARES Act increased to $7,500,000 until March 27, 2021.)
• Are not a corporation, or its affiliate, subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934.
What Are the Reasons to File a Small Business Chapter 11 Case?Don't file a Small Business Chapter 11 case unless:
- Your business operations can be maintained.
- You can propose a feasible plan of reorganization which includes paying off your debts over 3-5 years.
In particular, certain problem situations lend themselves to successful Chapter 11 case. You should seriously consider a small business Chapter 11 when your business is generally viable but:
• You need to restructure your current debt to maintain your ongoing business operations.
• You have executory contracts and unexpired leases that are not advantageous or contain above-market prices.
• Your creditors, usually taxing authorities, are threatening to seize your assets or cash that you need to continue your operations.
Advantages of a Small Business Chapter 11 over a traditional Chapter 11Without going into depth, detail or covering the nuances, the Small Business Chapter 11 has some of the following advantages over the traditional Chapter 11 case.
1. Faster and More Control. Only you, as debtor, may propose a plan, and you must, absent “circumstances for which the debtor should not justly be held accountable,” file a plan within 90 days of filing for bankruptcy. This deadline will come up super quick so you have to work hard and fast but your chapter 11 plan is much more likely to be filed and confirmed within a reasonable amount of time in an SBRA case.
2. No Absolute Priority Rule. Under traditional Chapter 11’s, a debtor can’t keep any equity unless all creditor classes vote to accept the plan of reorganization or are otherwise paid in full. So an equity who wants to keep equity in the reorganized business typically needs to provide “new value” (i.e., additional capital) into the business. In a Small Business Chapter 11, you don’t have to worry about that as long as your bankruptcy plan provides for the payment of all of the business’s projected “disposable income” over a three-year period or “such longer period not to exceed five years as the court may fix…”
3. No Mandatory Creditor Support. A bankruptcy plan normally requires at least one class of creditors whose rights are being altered or modified in any manner to vote to accept the plan if any other class of creditors votes to reject the plan. The Small Business Chapter 11 eliminates this requirement, and, a plan that does not discriminate unfairly, and is fair and equitable, with respect to each class of claims may be confirmed.
4. No Creditors’ Committee. In most chapter 11 cases, a committee of creditors holding unsecured claims is appointed. The committee complicates, slows down and increases the cost of a Chapter 11 case. The Small Business Chapter 11 only appoints a committee for cause which most likely makes it the exception rather that the rule.
Is a Small Business Chapter 11 Right for You?Like everything in law, it depends. The Covid-19 economic crisis is causing and will continue to cause financial harm which is going to severely hit small businesses. Small businesses will have a most difficult time weathering long stay at home orders or wary consumers. Hopefully, you have received some of the stimulus and can fight through this most unusual period through negotiation and restructuring.
But, if you believe that you need more cooperation from your landlord and creditors to make it possible for you to survive; you meet the qualifications and reasons for filing discussed above; and you believe in your business for the long run, then you should definitely consider filing a Small Business Chapter 11 case.