By David M. S. Shaiken
On August 23, 2019, the Small Business Reorganization Act (“SBRA”) was signed into law. It became effective on February 19, 2019. The SBRA created a new Subchapter V to Chapter 11 of the Federal Bankruptcy Code, which made it simpler and more cost-effective for small businesses to reorganize in Chapter 11.
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), effective March 27, 2020, amended the SBRA. As amended by the CARES Act, the SBRA now provides that individuals and businesses with up to $7.5 million of debt are eligible for Subchapter V bankruptcy relief. On March 27, 2021, the debt limit goes down to $2,725,625. Therefore, from now until March 27, 2021, businesses that would otherwise exceed the Subchapter V debt limit may be eligible to file a Subchapter V bankruptcy case.
The key provisions of the SBRA are as follows:
- Upon the commencement of the case, a trustee will be appointed. The trustee will have limited duties: to facilitate a consensual plan of reorganization, to appear and be heard at hearings, and to see to it that the debtor makes payments required under a confirmed plan of reorganization. Creditors’ committees will not be appointed unless the court orders otherwise, so the trustee will serve some of the traditional duties of a Chapter 11 creditors’ committee, and the bankruptcy estate will not bear the burden of paying a creditors’ committee’s professional fees and expenses.
- Unlike a regular Chapter 11 case, only a debtor may file a plan of reorganization in a Subchapter V case. The debtor must file the plan within 90 days of the date of a voluntary Chapter 11 petition, with the possibility of receiving an extension of time. No disclosure statement is required. Because of the short time period for the filing of a plan of reorganization, Subchapter V debtors should be well along to formulating the terms of a plan by the time the case is filed.
- The plan will generally have a three-year term, with a limit of five years. It is not necessary to have a yes vote from an impaired class of creditors. The debtor must commit to paying all of its projected disposable income to creditors under the plan. The absolute priority rule is eliminated in Subchapter V, which means that the equity owners may retain their equity even if creditors are not being paid in full, and they do not have to contribute new value to the plan.
- Administrative claims, e., claims by creditors who provide post-bankruptcy petition goods and services to the debtor, do not have to be paid in full at the time the plan is confirmed, but rather may be paid over time. This is a change from the rule in a traditional Chapter 11 case, and is good for debtors, but bad for post-petition creditors. Open account post-petition creditors may wish to impose C.O.D. terms. Creditors with a supply contract may not be able to impose C.O.D. terms, at least not without court approval.
- A loan secured by an individual Subchapter V debtor’s principal residence may be modified if the loan proceeds were used primarily in the debtor’s business. This provision offers the opportunity to reduce the interest rate, extend the term, and in some circumstances to reduce the principal amount of the mortgage.
- If the plan is consensual, meaning creditors have voted to accept it, then the debtor’s discharge enters at the time of confirmation of the plan. If the plan is not consensual, then the discharge enters after the completion of the first three years of plan payments.
The new Subchapter V presents opportunities for debtors, and requires greater vigilance on the part of creditors to monitor the case, which will proceed more rapidly than a traditional Chapter 11 case. As always, whether you are a debtor or a creditor, we are here to assist you with your business bankruptcy needs.
For more information contact David Shaiken (860-606-1703), david@shipmanlawct.com.