The Combination of the Small Business Reorganization Act of 2019 (SBRA), and the Coronavirus Aid, Relief and Economic Security Act (CARES Act) Create New, Streamlined, Less Expensive Bankruptcy Reorganization Route for Many Small Businesses
Through passage of the Small Business Reorganization Act of 2019 (SBRA), effective February 19, 2020, Congress amended the Bankruptcy Code to provide a new, more streamlined, less expensive route for small businesses to reorganize. The route, known as a Subchapter V reorganization, allows businesses with noncontingent, liquidated, secured and unsecured debt of not more than $2,725,625 to file a Subchapter V bankruptcy reorganization, avoid some of the traditional costs that burdened a typical Chapter 11 bankruptcy reorganization, commit to repay creditors with available disposable income over the following 3-5 years, and emerge discharged from most obligations to unsecured creditors. Due to the economic difficulties anticipated from the worldwide coronavirus pandemic, Congress significantly raised the debt limit for companies eligible to file Subchapter V reorganization cases. For cases filed on or before March 27, 2021, the eligible debt limit is increased to $7,500,000.
How Can a Subchapter V Reorganization Help My Business?
Suppose you had a relatively healthy business pre-Covid-19, but through the difficulties, your business incurred $1,000,000 of new unsecured debt to landlords, suppliers, employees, or others, during the shut-down. As business resumes, you are confident that your business income over the next three to five years, after paying regular operating expenses, will be sufficient to generate more than $1,000,000 in profit, or even just a few hundred thousand dollars in profit, that could be used to repay some or all of that $1,000,000 Covid-19-related debt. By filing a Subchapter V reorganization, you may be able to, with or without the cooperation of your creditors, stay in business with a commitment to use the excess profit anticipated in the coming years to repay the creditors who might otherwise have forced you to close your business.
Isn’t a Chapter 11 Business Reorganization Very Expensive?
In a typical Chapter 11 case, there are substantial attorneys fees incurred both by the debtor business and counsel for a committee of unsecured creditors formed to oversee the case, as well as fees that must be paid to the Office of the United States Trustee. SBRA eliminates or reduces those fees significantly, by removing some of the legal requirements of a chapter 11 case. For instance, in Chapter 11, a debtor generally must prepare a disclosure statement along with its Chapter 11 plan; there is no disclosure statement required in a Subchapter V reorganization. Also, there is no committee of unsecured creditors in a Subchapter V reorganization; instead, there is a standing trustee with some supervisory authority, but optimally a much lower financial cost to the estate. Additionally, Chapter 11 debtors are required to pay quarterly fees to the Office of the United States Trustee; those fees are not required of Subchapter V debtors. And the timeline for confirming a Subchapter V reorganization is shortened to approximately 120 days (a plan must be filed within 90 days of the commencement of the case), making it easier to move quickly through bankruptcy, if the problems that necessitated the filing are mostly resolved. Finally, in some Subchapter V reorganizations, some or all of the legal fees to your counsel may be deferred and repaid over time, rather than born as an upfront cost.
Can a Subchapter V Reorganization Help Me with Secured Claims?
Many of the same tools available in a standard chapter 11 reorganization remain useful in a Subchapter V reorganization. If you missed a few mortgage payments during the shut-down, it may be possible to cure those missed payments over time, while resuming the regular mortgage payment on your place of business. It may also be possible to effectively force a refinancing of your secured debts, to extend the term or reduce the interest rate, as long as the treatment to the secured creditor remains “fair and equitable.” If you own a sole proprietorship, and your business debts are secured by a non-purchase-money mortgage on your principal residence, it may even be possible to modify that debt in a Subchapter V reorganization– an option that has rarely been available under prior law.
When is the Best Time to Explore These Options?
While the general process available under a Subchapter V reorganization is expected to be available to small businesses for the foreseeable future, the increased debt ceiling approved in the CARES Act has a sunset, so businesses with more than about $2.7 million in debt, but less than $7.5 million in debt, should explore their options well before the March 27, 2021 filing deadline currently in force.
The Bankruptcy Group at Clyde Snow & Sessions, led by James Anderson and Ted Cundick, stands ready to assist you in fully exploring whether a Subchapter V Reorganization can help save your small business. And if your business’ problems are bigger, the Firm has extensive experience in large Chapter 11 reorganizations, assisting Debtors and Creditors to navigate the entire bankruptcy process.