By: Jason Johnson
In the coming weeks, the Small Business Reorganization Act (the “SBRA”) will go into effect.
As part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005—the most significant large-scale change to the Bankruptcy Code since its enactment—Congress amended the Bankruptcy Code to define certain businesses as “small business debtors,” and to provide special rules and procedures for reorganization cases involving such debtors. Unfortunately, these changes did not have the impacts desired by Congress—largely due to the continued significant costs associated with the Chapter 11 process. Accordingly, the SBRA was passed by the 116th Congress and signed into law by the President on August 23, 2019. As a result, on February 19, 2020, debtors (both companies and individuals) with non-contingent, liquidated debts (both secured and unsecured) of not more than $2,725,625 may choose to reorganize under the new Subchapter V of Chapter 11, rather than the other subchapters.
The SBRA goes much further than the 2005 revisions to the Bankruptcy Code, and is intended to provide meaningful relief to small business owners who need to reorganize. It removes many of the procedures required under the “normal” Chapter 11 process and, as a result, will greatly reduce the cost of Chapter 11 to small businesses, while increasing the efficiency of the reorganization process. For instance, it eliminates the requirement that debtors in these cases pay quarterly fees to the United States Trustee, it eliminates the possibility of the appointment of an Official Committee of Unsecured Creditors, and it eliminates the requirement that confirmation of the Debtor’s proposed plan of reorganization be preceded by the filing and approval of a disclosure statement (though the liquidation analysis and projections typically associated with disclosure statements will be incorporated into reorganization plans filed under the SBRA). A Subchapter V Trustee will be appointed in each case, both to assist with the confirmation process and—similar to a Chapter 13 Trustee—ensure that the debtor commences payments to creditors under a confirmed plan. Also similar to Chapter 13, the length of a proposed plan under the SBRA may not be less than 3 years and no longer than 5 years. With the requirement of a status conference by the bankruptcy court within 60 days of filing, the requirement of the filing of a plan of reorganization by the debtor within 90 days of filing, and the elimination of the possibility of a competing plan by creditors, the confirmation process should be much faster and more streamlined than in “normal” Chapter 11 cases.
For secured creditors, there is one significant change and some unanswered questions. Secured creditors holding liens on the principal residences of debtors may see the terms of their loans altered more severely than in other Chapter 11 cases, if the proceeds of the loan were not used as purchase money for the residence and were instead used to fund the debtor’s business. For other commercial secured loans, the big question is the interest rate that the bankruptcy courts will apply to the restructuring of these loans.
As with any major new law, questions remain over the impact of its implementation. One thing is certain: while the SBRA will not have much of an impact on the “mega case” districts like the District of Delaware and the Southern District of New York, it is likely to have significant impacts on the way business bankruptcy cases are conducted in most jurisdictions throughout the country, including Florida.
If you have a customer or borrower who is indicating that they may file for protection under the Bankruptcy Code, you should immediately seek out competent bankruptcy counsel.
Jason Johnson is board certified in Business Bankruptcy, is a former President of the Central Florida Bankruptcy Law Association, has been representing creditors and other parties in bankruptcy cases for over 20 years, and is a former judicial law clerk in the United States Bankruptcy Court for the Middle District of Florida.