New Ch. 11 Bankruptcy Codes Provide Relief for Small Businesses

Chapter 11 bankruptcy, frequently described as reorganization bankruptcy, often provides businesses with a plan to reorganize and restructure, in order to pay their debt and keep their business alive. 

The sharp, unexpected turn in the market and temporary forced closures have strained small businesses as their debts continue to accrue. While we all hope for a quick recovery, it’s important for businesses to think about the potential financial stressors arising. 

At a time when almost all small businesses are facing economic hardship, chapter 11 may seem like a simple solution for a chance at a comeback. However, under normal provisions, filing for chapter 11 can be extremely costly for businesses and the process itself may take too long, as businesses will be opening back up to a dry and uncertain market. 

That’s why officials have banded together to enact significant changes to Chapter 11 in an effort to make the process faster and more effective for small businesses in distress during this time. 

The Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act) and the Small Business Reorganization Act of 2019 (SBRA, also referred to as “Subchapter V”) which became effective in February 2020, have made the following revisions:

  • The CARES Act temporarily raises the maximum debt level to qualify from $2,725,625 to $7,500,000. Raising this debt level allows for thousands of more businesses to qualify for relief. This new limit expires after one year. 
  • The SBRA only allows the debtor to file a plan of reorganization. This makes it more difficult for creditors to contest cases, which typically increases the length of the proceeding, and the cost. 
  • It’s important to note that the SBRA also shortens the amount of time for the debtor to file their plan. The time period is now 90 days, as opposed to 120 days.
  • Eliminates the requirement for a disclosure statement (a court-approved disclosure that must be made to creditors regarding the proposed plan)
  • Requires that a “Subchapter V” trustee be appointed by the bankruptcy court to ensure that the debtor remains on track with it’s payments according to the confirmed plan.
  • Eliminates requirement of quarterly fees paid by the debtor to the United States Trustee
  • Debtors may obtain approval of their reorganization plan by permitting a bankruptcy court to approve without creditor support as long as it is deemed “fair and equitable.”

These updates to Chapter 11 reorganization bankruptcy are important to note for all businesses as they begin to strategize during these uncertain economic times.

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