April 7, 2020 (Updated April 5, 2021)

Client Alert
On February 19, 2020, the Small Business Reorganization Act of 2019 (“SBRA”) came into effect and Debtors with aggregate liabilities that do not exceed $2,566,050 were provided an opportunity to resolve their outstanding liabilities through a newly streamlined and cost‑effective Chapter 11 bankruptcy proceeding. But even before the SBRA could see its first successes (or failures), the Coronavirus Aid, Relieve and Economic Security Act of 2020 (“CARES Act”) increased a small business’s debt threshold to $7.5 million. This increased eligibility will remain in effect for one (1) year. On March 27, 2021, President Biden signed a law extending the increase in small business eligibility to March 27, 2022.

With only 27% of small business debtors that filed Chapter 11 from 2008-2015 successfully confirming a plan of reorganization, the SBRA is a means to provide small businesses with a chance to avoid liquidation. Some of the key provisions of the SBRA follow:

  • Only the debtor may file a Chapter 11 plan, and no disclosure statement is required (but the SBRA requires that the debtor file its plan within 90 days of the date it files its bankruptcy petition; which may be extended under limited circumstances);
  • Initial status conference within 60 days of filing of petition;
  • A standing trustee similar to those appointed in Chapter 13 cases will be appointed to oversee each small business case;
  • A creditors committee will not be formed (unless the court orders otherwise);
  • The Chapter 11 plan can modify the rights of a creditor secured by a security interest in the debtor’s principal residence if the loan secured by the residence was not used to acquire the residence but was used in connection with the debtor’s business;
  • The Court can confirm a debtor’s plan without the support of any class of claims as long as the plan does not discriminate unfairly and is deemed to be fair and equitable with respect to each class of claims;
  • To be fair and equitable, the Chapter 11 plan must provide that all of the debtor’s projected disposable income to be received during the length of the plan will be applied to make payments under the plan for a period of 3 to 5 years;
  • Changes the preference law: raises the threshold for non-insider defendants from $13,650 to $25,000. In addition, SBRA adds as a requirement that, before filing the lawsuit to recover a preference, the trustee or debtor in possession must exercise reasonable due diligence and must “. . . take into account a party’s known or reasonably knowable affirmative defenses . . . .” (likely resulting in far fewer preference claims).

CARES Act just likely tripled the amount of businesses eligible for protection under SBRA. Whether that means there will be a rush of Chapter 11 filings in the next year is obviously yet to be seen, but with the economic shutdown mainly affecting small businesses such as restaurants and bars, one would expect many more Chapter 11 filings before the end of March 2021.

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