The Small Business Reorganization Act of 2019 (SBRA), which became effective in February 2020, created a new subchapter V to chapter 11 of the Bankruptcy Code specifically for small business debtors, which can be business entities as well as individuals.
To qualify for relief under the SBRA, a debtor must have total unsecured and secured debt not exceeding $2,725,625 and more than 50% of the debt must be commercial or business. With the enactment of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) in March 2020, this debt ceiling was recently raised to $7.5 million for 1 year, which will provide additional opportunity for qualifying businesses to take advantage of the provisions of the SBRA. Congress has further extended the increase to $7.5 million in the debt limit under the SBRA to 6/21/24.
Under the SBRA, the process for gaining approval of a chapter 11 plan becomes more similar to chapter 13, in that creditor approval of the plan is not required, as long as other statutory requirements for approval of the plan are met.
A qualifying debtor must propose a plan within 90 days that commits all of its disposable income as defined by the bankruptcy laws for the next 3 to 5 years. It eliminates the “absolute priority rule” restriction against a debtor retaining an ownership interest in the business even if creditors are not paid in full, as long as the plan is determined to be fair and equitable to each class of creditors.
A plan may also allow debtors to modify certain home mortgage claims for which their residence was pledged in part as collateral for a business loan, which is typically not allowed in other chapters of bankruptcy.
A debtor may also pay administrative claims, such as attorneys fees, over the life of the plan, unlike in a standard chapter 11 in which such claims must be paid by the plan confirmation date. It also eliminates many of the other costly requirements of a regular chapter 11 case, including solicitation of creditor vote (thus eliminating the need for a disclosure statement), a creditors’ committee, and the U.S. Trustee and reporting requirements. Instead a private trustee will be appointed to a SBRA case to supervise the process.