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A Quick Guide to the Small Business Reorganization Act

Since amendments were made to the Bankruptcy Code in 2005, small business owners have struggled with how to effectively organize their debts under Chapter 11 of the Bankruptcy Code. In August 2019, however, President Trump signed the Small Business Reorganization Act of 2019, which was designed to help small business bankruptcies proceed more quickly and cost less. 


Critical Parties in the Small Business Reorganization Act


To be eligible for relief under the Small Business Reorganization Act, debtors with both secured and unsecured debt must be less than $2,725,625 in debt.


The principal parties in a Small Business Reorganization Act case include the debtor who remains in possession of the property and a trustee who is appointed in the proceeding. The trustee’s duties are more limited than those of a trustee in other types of bankruptcy proceedings. 


Elements of the Small Business Reorganization Act


Some of the most noticeable elements of the Small Business Reorganization Act include:


  • Appointment of trustees. The Small Business Reorganization Act states that standing trustees function as the trustee for small business bankruptcy states. The trustee plays the critical role of helping with the small business debtor’s reorganization, which includes monitoring the debtor’s progress through the reorganization plan.
  • Delayed payment for administrative expense claims. The Small Business Act removes the requirement that debtors must pay administrative expense claims on the plan’s effective date. In contrast to Chapter 11, small business debtors are now able to stretch the payment of administrative expense claims over the terms of a plan.
  • Discharge limitations. Courts must allow the discharge of debt under the Small Business Act and the completion of all payments within the first three years of the reorganization plan. This discharge relieves all personal liability for debt except for any debt on which the last payment falls after the length of the plan or any other non-dischargeable debt. All exceptions to discharge in Section 523(a) of the Bankruptcy Code apply to small business debtors.
  • Elimination of the New Value Rule. The Small Business Reorganization Act removes the requirement that equity holders of the debt offer a “new value” to retain their interest in the debtor. For plan confirmation, the Small Business Reorganization Act only requires that a plan does not discriminate, is fair and equitable, and that all of a debtor’s projected disposable income is applied to payments under the plan or that the value distributed under the plan is not less than the projected disposable income of the debtor.
  • Modification of some residential mortgages. The Small Business Reorganization Act also removes prohibitions against individual small business debtor modification of residential mortgages. The Act now permits small business debtors to modify mortgages secured by a residence if the underlying loan was not used to acquire the residence and was primarily used as part of the debtor’s small business. 
  • Streamlining reorganization. The Small Business Reorganization Act both streamlines small business reorganization as well as removes procedural burden and costs associated with typical corporate reorganizations. Only a debtor can propose a reorganization plan. Small businesses, however, are not required to obtain approval of separate disclosure statements or solicit votes to confirm a plan. The Small Business Reorganization Act also requires courts to hold status conferences within 60 days of the petition and that the small business debtor file a plan within 90 days of the date of the petition.



The Benefits of the Act


The advantages of Chapter 11 reorganization have eluded small business owners. This change, however, attempts to remove many of the obstacles associated with small business reorganization. 


If these changes end up being effective for small business debtors, there will likely be a legislative effort to increase debt limitations and provide a larger number of businesses with the ability to take advantage of this bankruptcy chapter. While the Act has only been effective for several months, it is already playing a valuable role for many companies impacted by the coronavirus pandemic.


How the CARES Act Modified the Small Business Reorganization Act


After taking effect in February 2020, many small business owners, the Coronavirus Aid, Relief, and Economic Security (CARES) Act amended the Small Business Reorganization Act to increase the amount that a debtor can owe and proceed under this option to $7.5 million for a period beginning March 27, 2020. The debt cap will be reduced back to $2,725,625 a year following the passage of the CARES Act. 


Some of the other changes to the Small Business Reorganization Act as a result of the CARES Act include:


  • To be eligible, a debtor cannot be a single asset real estate company, cannot be affiliated with other debtors with combined debts greater than $7.5 million, and cannot be publicly traded.
  • Debtors are not eligible for the Small Business Reorganization Act if they are affiliates of “issuers” as defined by the Securities Exchange Act of 1934.
  • The Small Business Relief Act provides for the appointment of a standing trustee who will assist in managing the confirmation and development of a reorganization plan.
  • Only a debtor is permitted to file a chapter 11 plan and must do so within 90 days. Disclosure statements are not always mandatory given that the plan contains adequate details.
  • Courts can confirm a reorganization plan without the vote of any impaired class provided that the plan does not discriminate unfairly and is fair and equitable.”Fair and equitable” has been modified to provide for all of a debtor’s disposable income received during the length of a reorganization plan.
  • The prohibition on equity holders of a debtor retaining their interests without paying creditors in non-consenting classes does not apply to debtors who file under the Small Business Reorganization Act. 

Speak with a Knowledgeable Bankruptcy Attorney Today


The Small Business Reorganization Act is a complex aspect of bankruptcy but plays a valuable role for both small business entities and owners who are facing financial difficulties. If you need the assistance of an experienced bankruptcy attorney, do not hesitate to contact attorney Melanie Tavare today.


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