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Small Business Reorganization Act of 2019 Goes into Effect February 2020

On August 23, 2019, President Donald Trump signed into law the Small Business Reorganization Act of 2019, which will go into effect in February 2020. The act creates a new Subchapter V under Chapter 11 of the US Bankruptcy Code. The act eliminates some of the more costly elements of traditional Chapter 11 relief, such as disclosure statements, and in some ways is modeled after expedited procedures used in Chapter 12 and 13 cases. The act was designed to promote simplicity and efficiency for reorganization of small-business debtors. Highlights of the act include the following:

  • Debtors with non-contingent, liquidated debts (secured and unsecured) totaling not more than $2,725,625 may opt for Subchapter V relief.

  • While the concept of debtor-in-possession is retained, the act also requires the United States Trustee to appoint a trustee in every Subchapter V case, which may include the appointment of standing trustees. The trustee is not an operational trustee but rather serves in a role similar to a Chapter 12 or 13 trustee in disbursing plan payments. The trustee will also be responsible for assisting the debtor in formulating a plan and otherwise participating in the reorganization process.

  • An unsecured creditors committee may not be appointed in a Subchapter V case unless ordered by the court for cause.

  • Within 60 days of the petition (unless extended by the court due to circumstances “for which the debtor should not justly be held accountable”), the court must hold a status conference to determine how best to proceed with the case.

  • A plan must be filed within 90 days of the petition date. The court can extend this deadline if circumstances exist for which the debtor should not be held accountable. Moreover:

    • Only a debtor may file a plan.

    • The plan must contain some information traditionally addressed in disclosure statements, such as a brief history of the business operations, a liquidation analysis, and a projection of the debtor’s ability to make payments under the proposed plan.

    • The plan length may be no less than three years and no more than five years, and all disposable income must be dedicated to the plan.

    • In a significant departure from Chapter 13 practice, the Subchapter V plan may modify the rights of a secured lender with a lien on the principal residence if the “new value” received from the loan was not used primarily to acquire the residence and was used primarily in connection with the small business. This will enable debtors to alter the terms of home equity loans and second mortgages obtained for business purposes.

    • The plan may be approved if it is feasible, does not unfairly discriminate, and is fair and equitable to non-consenting, impaired classes of creditors.

  • Under the act, a discharge is not granted until the debtor completes all payments due within the first three years of the plan or a longer period not to exceed five years as the court may fix. The discharge applies to all debts addressed by the plan except for debts (1) on which the last payment is due after the first three years of the plan, or such other time fixed by the court not beyond five years, or (2) debts otherwise non-dischargeable.

The act leaves some issues unanswered. For example, it is unclear what interest rate applies to secured loans under confirmed plans. Will it be the contract rate or some presumptive rate established by local rule, as is the case with Chapter 13 cases in many jurisdictions? It is also unclear how courts will apply prior Chapter 12 and Chapter 13 precedents to new Subchapter V cases.

The act could have an impact on many lenders. It may result in more filings by debtors who cannot afford the traditional Chapter 11 process. Debtors will be able to more easily obtain confirmation of plans over creditor dissent and to cram lenders down on the value of residential collateral used for business loans. At the same time, it should generally be a faster process that overall may reduce costs for creditors and provide greater chances of repayment due to the involvement of a trustee. 

© 2019 Jones Walker LLP

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About this Author

Jeffrey Barber, Jones Walker Law Firm, Business and Commercial Litigation Attorney
Partner

Jeff Barber is a partner in the firm's Business & Commercial Litigation Practice Group and practices from the firm's Jackson office. He is also the office head for the firm's two Mississippi locations. He focuses his practice on bankruptcy and creditors' rights and is a frequent lecturer on bankruptcy and creditors' rights matters. He regularly represents clients in bankruptcy proceedings and assists them in restructurings. In addition, he has served as an adjunct professor of Debtor-Creditor Law at the Mississippi College School of Law and is the author of several...

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