Small Business Bankruptcy
Effective February 19, 2020, Congress enacted new legislation granting debtors the option to elect a new subchapter V of chapter 11 of the bankruptcy code (Subchapter V). This was made possible by the legislation known as the Small Business Reorganization Act of 2019 (SBRA). Small Business Reorganization Act (SBRA) of 2019, Pub. L. No. 11654, 133 Stat. 1079. The SBRA was enacted to provide “small business debtors,” defined in § 101 (51D) as a person
- Engaged in a commercial business activity, excluding the ownership of single asset real estate as defined in 11 U.S.C. §101 (51B),
- Non-contingent liquidated secured and unsecured debt as of the date of the filing of the petition not more than $2,725,625.00 (excluding debts owing to affiliates and insiders), and
- The majority of such debts must have arisen from the commercial or business activities of the debtor.
Additionally, the debt cap was then increased to $7,500,000 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (effective March 27, 2020 for the period of one year).
The combination of these two pieces of legislation provide the opportunity for small business debtors to reorganize in a cost-effective manner.
ADVANTAGES OF SUBCHAPTER V
1. Voting Is Not Necessary to Confirm Plan
2. Elimination of Absolute Priority Rule
Now, so long as the Debtor applies all his/her disposable income to the Plan for a period of three to five years, a court may confirm a plan over the objection of unsecured creditors. Removing this hurdle allows small business owners to continue managing their business and enjoy the benefits of ownership.