Troubled small business owners often do not have the financial resources to file for relief under Chapter 11 of the Bankruptcy Code and confirm a plan of reorganization. Chapter 11 is designed to assist troubled companies reorganize their debt, allowing for a fresh start and continued operations. Congress offered a resolution: the Small Business Reorganization Act (SBRA).
What is SBRA?
Congress passed SBRA in August of 2019 and the law went into effect in February of 2020. It expanded the ability of small businesses to make use of reorganization plans with the addition of a new subchapter. This addition, referred to as Subchapter 5, attempts to streamline the reorganization process for most small businesses with debts of $2,725,625 or less (the CARES Act increased the debt limit for eligible debtors from $2.7 million to $7.5 million.)
Additional key provisions include:
- Removal of unsecured creditors’ committee. One expense incurred in a Chapter 11 proceeding that is eliminated in a Subchapter 5 proceeding is the funding of professionals representing an official committee of unsecured creditors. Comprised of unsecured creditors, a committee in a Chapter 11 case has the ability to hire professionals at the expense of the debtor. Often these fees and expenses are more than a small company can afford to pay in addition to their own professionals, making a Chapter 11 proceeding impossible to fund.
- Trustee. In a Subchapter 5 proceeding, a trustee is automatically appointed and serves to help with the reorganization plan and monitors payments once approved — all the while letting the business owner continue to focus on operations.
- Tight timeline. Subchapter 5 proceedings are designed to shorten the plan process, as compared to a traditional Chapter 11. Subchapter 5 requires the debtor to submit a reorganization plan within 90 days of filing the bankruptcy case.
Although relatively new, small business advocates are hopeful the law will help better ensure small businesses survive during difficult times.
Has it worked?
From Feb. 19 through September 30 of 2020 an estimated 1,100 small businesses filed for protection under subchapter 5. The group furthers states that more than 75% of all small businesses who moved forward with bankruptcy during that time period elected for subchapter 5. ABI also found that those who use subchapter 5 report a higher rate of confirmation and that the process has taken less time compared to the traditional Chapter 11 bankruptcy process. Upon review of this information, the American Bankruptcy Institute (ABI) has stated SBRA is “off to a pretty good start.”
Ultimately, SBRA offers an additional tool for business owners who are struggling with debt that makes it difficult to keep operations moving forward. Business owners who find themselves in this situation are wise to consider this and other options before choosing the best path for the business’ future financial success.