Annapolis, Maryland. The Small Business Reorganization Act of 2019 provides new tools for small businesses to reorganize and re-emerge as viable enterprises. The Act, which took effect on February 19, 2020, targets small businesses with debts of less than $2,725,625 (increased to $7.5 million under the CARES Act for one year).
Before the enactment of the SBRA, small businesses could reorganize only under Chapter 11 of the Bankruptcy Code – which in most instances forced small business owners to put their equity in their business at risk, and walk a time-consuming, expensive and uncertain route to confirm a plan of reorganization. The SBRA eliminates many of these hurdles – providing powerful tools to a small business seeking to reorganize, including the following:
•A fast-tracked and simplified confirmation process, requiring the filing of a plan whereby the business contributes its projected disposable income and does not discriminate unfairly among creditors within 90 days of the initiation of the bankruptcy case.
•The elimination of many onerous Chapter 11 requirements, such as those that require that a business must pay all unsecured creditors in order for the owners to retain their equity interests – although the business may not be able to discharge certain debts, including those that have arisen as a result of fraud or and breach of fiduciary duty, without the consent of creditors.
•The ability for the business to modify mortgages and other liens secured by an owner’s residence ( including in some instances extending maturity and modifying amortization and interest rates), as well as the ability for the business to pay priority claims – which might include payments for goods and services provided to the small business during bankruptcy – over the three to five year term of the plan..
•The appointment of a Trustee to facilitate reorganization and monitor payments to creditors under the debtor’s confirmed plan.
Effective reorganization benefits from as much advance planning as possible. It is too often the case that businesses wait too long to consider a reorganization strategy, thereby depleting cash, losing employees and customers, incurring non-dischargeable liabilities and/or alienating vendors that may be critical to continuing in business. While the tools provided by the SBRA are powerful, they are only tools for accomplishing a realistic and well-considered strategy for reorganization.