New Small Business Reorganization Act of 2019
New Small Business Reorganization Act (SBRA) of 2019
SBRA 2019, Also Known as Subchapter V
Based on evidence from previous Chapter 11 filings, Congress came to realize that in spite of the provisions previously provided to small business debtors in Chapter 11, these were not enough. Evidence indicated that the typical small business debtor has debts that exceed Chapter 13 limits but cannot afford a Chapter 11. Moreover, most small business debtors cannot come up with new value at the end of the process. As a result, most small business debtor cases end up being dismissed or converted to a Chapter 7 liquidation. Of the Chapter 11 cases previously filed, about 40% would have qualified for Subchapter V.
To address the concerns of the small business debtor, Subchapter V combines some features of Chapters 12 and 13 with those of Chapter 11 and eliminates some Chapter 11 requirements that have been difficult for the small business debtor to meet. Congress does not eliminate previous provisions for small business debtors in Chapter 11 but added the new Subchapter V in its entirety instead.
Subchapter V came into effect on February 19, 2020. To be eligible, the small business debtor can be an individual or a business entity having a total non-contingent, liquidated secured and unsecured debt of $2,725,625, and at least 50% of that debt must be based on business or commercial activity.
The SBRA eliminated the real estate exclusion, which previously allowed only single asset real estate debtors to file Chapter 11. Now a debtor whose primary activity is to own and operate multiple properties or projects can be eligible for Subchapter V if all other qualifications are met.
Subchapter V could not have come at a more opportune time. On March 27. 2020, coming at the heels of Subchapter V, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES). The CARES Act amended Subchapter V to temporarily increase the debt limits to $7,500,000 in aggregate debt. The amendment from the CARES Act will expire within one year of its passage.
In a Subchapter V, the unsecured creditor committee is eliminated and a “Chapter 13-like” standing trustee is appointed to be accountable for all payments and property received from the debtor, to review filed proofs of claim, object to improper filings, provide information concerning the estate to any party-of-interest, and make a final report. The owner of the small business debtor remains the debtor-in-possession and is free to run the business. But if the debtor-in-possession is removed, the standing trustee will step in to operate the business.
A Subchapter V debtor may now modify a mortgage secured by the owner’s primary residence if the underlying loan was not used to purchase the residence but was taken out for commercial purposes.
Perhaps one of the most beneficial changes is the Subchapter V elimination of the absolute priority rule. In a traditional Chapter 11, the rule presented a big stumbling block for the small business debtor, because at the end of the process, the small business debtor had difficulty coming up with new value with which to pay off the classes of creditors that were above his equity interest, as required by the absolute priority rule. Equity holders can now hold on to their interests without first paying off non-consenting impaired classes above them.
While the Subchapter V debtor has only 90 days by which to file a feasible Plan, and the traditional Chapter 11 debtor has 300 days, no vote from an impaired class of unsecured creditors is required for confirmation of the Plan. A Plan can be confirmed even if there is no class of accepting creditors. Furthermore, unlike the traditional Chapter 11, no competing plans from creditors can be filed in Subchapter V. In a Subchapter V, only the debtor can file a Plan.
The Disclosure Statement in a Subchapter V has been eliminated but the Plan must contain information that was traditionally provided in the Disclosure Statement. The Subchapter V Plan must include a brief history of the business’ operations, a liquidation analysis, and a projection of the debtor’s ability to make Plan payments. Moreover, the Plan must be feasible, not discriminate unfairly, and be fair and equitable. The Plan is considered to be fair and equitable if it provides for all of the debtor’s disposable income, or distributes some or all of the debtor’s property that is not less than the debtor’s disposable income for the duration of the Plan.
Finally, in a traditional Chapter 11 case, a business debtor received a discharge when the Plan is confirmed, and an individual receives a discharge when all payments have been completed. Under Subchapter V, if the court confirms a consensual Plan, the debtor receives a discharge upon plan confirmation. On the other hand, when the court confirms a Plan under a cram down, the debtor will receive a discharge after all plan payments have been made.
These are just a few of the benefits the new Small Business Reorganization Act of 2019 offers small business debtors seeking to reorganize. The Act has lowered the costs of filing a Chapter 11 for the small business debtor and has streamlined the process. The Act came just in time, to help small business owners devastated by the COVID-19 economy.
In order to fully understand the changes brought about by the SBRA, it is helpful to read the information abut the traditional Chapter 11 provisions on our website.
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