July 6, 2020

Volume X, Number 188

July 06, 2020

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Small Business Reorganization Act: The Vaccine for Small Businesses Suffering From the COVID-19 Pandemic

Timing is everything. On February 19, 2020, the Small Business Reorganization Act (SBRA), which added a new subchapter to the United States Bankruptcy Code, became effective. Commonly referred to as Subchapter V, the SBRA was enacted in an effort to reduce the cost and expense of small business bankruptcy reorganizations. Just in time for the global COVID-19 pandemic, which is anticipated to have a devastating impact on small businesses, Subchapter V may be a key to their survival. Congress seems to think so, as the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes the first amendment to Subchapter V, greatly expands its availability to small businesses.

Five Things Small Businesses Should Know About Subchapter V

1. Who is an eligible debtor under Subchapter V?

To be eligible for relief under Subchapter V, a debtor (whether an entity or an individual) must have total debt not exceeding $2,725,625 (subject to adjustment every three years). Section 1113 of the CARES Act increases the debt limit to $7,500,000. The increased debt limit applies to cases filed after the enactment of the CARES Act and is valid for one year after the CARES Act becomes effective. Thereafter, the debt limit will be reduced back to $2,725,625. In addition, single asset real estate debtors are ineligible for relief under Subchapter V.

2. Who are the principal players in a Subchapter V bankruptcy case?

The principal players in a Subchapter V bankruptcy case are:

  • The debtor who remains in possession of its property as a debtor-in-possession; and
  • The trustee appointed in the proceeding.

The trustee’s duties, significantly more limited than those of a trustee in other bankruptcy proceedings, will include facilitating the development of a consensual reorganization plan, appearing at major hearings in the case, and ensuring that a debtor commences making timely payments under a plan. Unless otherwise ordered by the Court, no creditors committee will be formed.

3. How long is the bankruptcy process?

The reorganization process under Subchapter V is far more expeditious than in a traditional chapter 11 case. The debtor need not file a disclosure statement and must file a chapter 11 plan within 90 days from its filing of a bankruptcy petition. From filing to confirmation, the process may be concluded in a few months.

4. What plan confirmation requirements are eliminated under Subchapter V?

  • The Absolute Priority Rule, pursuant to which equity interest holders cannot retain an ownership interest in a debtor’s assets unless all creditor claims are paid in full, does not apply.
  • The requirement that an impaired class of creditors accept the plan is eliminated. A plan can be confirmed without the vote of an impaired accepting class, providing that the plan does not discriminate unfairly and is deemed “fair and equitable” as to each class of claims. To meet the “fair and equitable” requirement, all of the debtor’s projected disposable income during the length of the plan, usually three or five years, must be applied to plan payments.
  • In a traditional chapter 11 case, a debtor must pay all administrative claims (which include post-petition claims and, in limited circumstances, reclamation claims arising from goods shipped to the debtor within 20 days of the bankruptcy filing) must be paid in full to confirm a plan. Subchapter V permits claims to be paid overtime.

5. When is a discharge effective?

If the court confirms a consensual plan, a debtor is entitled to a discharge upon confirmation. If the court confirms a nonconsensual plan, a debtor receives a discharge after completing all payments due within the first three years of the plan, unless otherwise ordered. If all such payments are made, the debtor would be relieved of liability except for future payments due under the plan.

Notwithstanding the losses which many small businesses will sustain from the impact of the COVID-19 pandemic, Subchapter V, with the expansion of its eligibility requirements under the CARES Act, may provide a valuable tool to assist many small businesses in their efforts to survive.

©2020 Norris McLaughlin P.A., All Rights ReservedNational Law Review, Volume X, Number 104

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About this Author

Melissa Anne Peña Bankruptcy Lawyer Norris McLaughlin
Member

Melissa A. Peña, Chair of the Bankruptcy and Creditors’ Rights Group, concentrates her practice on commercial litigation and bankruptcy and creditors’ rights. Her clients include financial institutions, private lenders, creditors, and accounting firms.  She has successfully represented secured creditors and unsecured creditors in Chapter 11 bankruptcy cases and state court insolvency proceedings.  She frequently handles commercial foreclosure actions, actions to enforce promissory notes and guarantees, lien priority disputes, fraudulent conveyance actions, and creditor enforcement matters...

917-369-8847
Bruce J. Wisotsky Bankruptcy Attorney Norris Law
Member

Bruce J. Wisotsky has represented debtors, creditors’ committees, equity committees, trustees, landlords, and other individual creditors in Chapter 11 and 7 bankruptcy proceedings in New Jersey, New York, Delaware, Florida, and other jurisdictions. He has also represented assignees for the benefit of creditors in state court insolvency proceedings. A significant portion of Bruce’s practice has involved out-of-court restructurings, either as counsel to companies and individuals experiencing financial difficulties or their creditors.

Bruce lectures on various bankruptcy issues before the New Jersey Institute for Continuing Legal Education, the Turnaround Management Association, and the Essex County Bar Association. He has addressed topics including prosecution and defense of preference actions, treatment of tax claims in bankruptcy proceedings, executory contract issues, and retention bonus issues. Bruce is a member of the New Jersey Regional Advisory Board of the Anti-Defamation League.  He also served as an officer and counsel to Help Darfur Now, a non-profit corporation which raises funds to purchase food and medicine for refugees in the Darfur region of Sudan.

Bruce is included in The Best Lawyers In America in the Bankruptcy Litigation and Bankruptcy and Creditor-Debtor Rights Law sections and New Jersey Super Lawyers in the Bankruptcy & Creditor/ Debtor Rights section. He was also named the Best Lawyers Bankruptcy Litigation “Lawyer of the Year” in the Woodbridge, New Jersey, Metro Area in 2018 and 2016.

(908) 252-4347