What is a Small Business Bankruptcy and How It Can Help Your Business?

What is a Small Business Bankruptcy and How It Can Help Your Business?

COVID19 has drastically changed the way we do business. From government shutdowns, reduced business hours, regulations and fewer customers, small businesses have faced an onslaught of hurdles that practically makes it impossible to effectively run a business. What you may not be aware of, however, is that United States Bankruptcy laws may be able to keep your business in business. In this article, we explore how small businesses are treated in bankruptcy as well as additional relief provisions afforded by Congress due to COVID19.

On August 23, 2019, well before COVID19, Congress enacted the Small Business Reorganization Act (“SBRA”). This law took effect on February 19, 2020. It was designed with the intent to help small businesses reorganize their affairs, stay in business and not be unduly burdened by the bankruptcy process. This new law only applies to small businesses or proprietors with less than $2.7 million of debt relief. In March, 2020, in the wake of the pandemic, Congress passed the Coronavirus Air, Relief and Economic Security Act (CARES Act) which increased the debt limits of the SBRA to $7.5 million.

Here is how these new laws help your small business in bankruptcy.

  • Debtors – businesses or individuals – can now file for relief if their total debt amounts to a maximum of $7.5 million, with at least 50% of it being commercial debt.
  • The bankruptcy court will hold a mandatory status conference within 60 days to “further the expeditious and economical resolution” of the case.
  • The process of filing bankruptcy when you own a business will be much faster. The deadline has been revised to 90 days from 120 days.
  • SBRA debtors are not mandated to pay the obligatory quarterly US Trustee’s Fees which are significant in a traditional Chapter 11 Bankruptcy case.
  • Debtors will be able to stretch out the duration of administrative expense claims over the entire term of the plan.
  • A plan of reorganization can only be filed by the debtor, effectively eliminating the risk of creditors filing competing plans.
  • The plan of reorganization filed by the debtor does not require voting by creditors meaning that there is a greater chance of confirmation.
  • Unless the bankruptcy court states otherwise, debtors do not have to provide a disclosure statement.
  • Creditors’ Committees will not be appointed under the new SBRA standards thereby reducing significantly administrative costs and their counsel fees.
  • A business owner can still keep their equity interest in the company even though unsecured creditors won’t receive full payment.
  • A bankruptcy trustee will be appointed to assist the company in restructuring its debts and assisting the debtor to formulate a consensual plan and by monitoring distributions in accordance with the terms of the plan
  • A debtor’s plan can modify a mortgage against a principal residence (unlike a typical non-SBRA Chapter 11 plan) provided that the mortgage loan was not used primarily to acquire the residence.

Perhaps most importantly, the bankruptcy process buys the small business time – which in these uncertain times is absolutely necessary. With governmental relief for COVID19 diminishing, a small business bankruptcy may provide the much-needed relief and time until the economy is back on track.