Over the years, much has been written about the Bankruptcy Code’s treatment of small businesses, and the American Bankruptcy Institute Commission’s testimony to Congress this summer made clear that the existing law fell short of providing necessary relief for small businesses. For example, of the 18,000 small business bankruptcy cases filed between 2008 and 2015, less than 27% of those cases resulted in confirmed plans of reorganization. And these numbers excluded countless small businesses that, for a variety of reasons, did not or could not seek bankruptcy relief. See Robert J. Keach, ABI Testifies on Family Farmers and Small Business Reorganizations, XXXVIII ABI Journal 8, 8-9, August 2019, available at https://www.abi.org/abi-journal/abi-testifies-on-family-farmers-and-small-business-reorganizations (subscription required). 

On August 23, 2019, the President signed four bipartisan bankruptcy bills into law, providing the first significant amendments to the Bankruptcy Code since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (and not counting the Bankruptcy Technical Corrections Act of 2010).

The first bill is the Small Business Reorganization Act (H.R. 3311; S. 1091) (SBRA), which is intended to “simplify the process for small businesses to use bankruptcy as a means of reorganization.”[1] The SBRA adds new Subchapter V (11 U.S.C. §§ 1181-1195) to the Bankruptcy Code. The full text of the SBRA can be found here: https://www.congress.gov/bill/116th-congress/house-bill/3311/text.

The SBRA maintains the existing definition of a “small business debtor” as a person engaged in commercial or business activities with aggregate noncontingent liquidated debts below $2,725,625 (subject to adjustment every three years), although the ABI Commission[2] has suggested that a natural breaking point might be closer to a $10 million debt level. Under the new law, a small business seeking relief under the Bankruptcy Code will have more flexibility to negotiate a consensual plan of reorganization, and will be assisted and monitored by a standing trustee.

Under the SBRA, many provisions that apply to individual chapter 11 cases and larger commercial chapter 11 cases will not apply to small businesses. Perhaps most notably, the “absolute priority rule”—which generally requires full payment of creditors for existing owners to maintain their ownership—will not prevent a small business from reorganizing. Rather, new sections 1190-1194 will provide a “projected disposable income” calculation to determine whether a plan is “fair and equitable,” mimicking the formula prescribed for chapter 13 cases.

Also somewhat like chapter 13 cases, new Subchapter V will appoint a standing “small business” trustee to perform new specialized duties, such as facilitating the development of a consensual plan, ensuring that plan payments are made timely, reporting fraud or mismanagement to the court and, if the debtor ceases operations, performing certain of the duties sometimes required of a chapter 7 or 11 trustee.

On the whole, the new law should make access to the bankruptcy courts much more feasible for small businesses in need of relief. A final change to the Bankruptcy Code under the new law is that attorneys owed less than $10,000 will not be disqualified from representing the debtor post-bankruptcy.

The SBRA will take effect on February 19, 2020, which is 180 days from the date of enactment. Stay tuned for further updates on the SBRA and other bankruptcy laws.

The other bills signed into law on the same date included: (1) the Family Farmer Relief Act of 2019 (H.R. 2336; S. 897), which increases the debt eligibility limit for chapter 12 family farmers to $10 million; (2) the National Guard and Reservists Debt Relief Extension Act of 2019 (H.R. 3304), which exempts certain debtors serving in the Armed Forces from means-testing requirements when seeking bankruptcy relief; and (3) the Honoring American Veterans in Extreme Need Act of 2019 (H.R. 2938), which excludes certain Veterans Administration and Department of Defense benefits from the calculation of “current monthly income” in the means-test calculation.

To sign up for e-mail updates from the NextGen Financial Services Report, Click Here.

[1] Cline, Cicilline Introduce Bipartisan Small Business Reorganization Act (Press Release, June 19, 2019) https://cline.house.gov/media/press-releases/cline-cicilline-introduce-bipartisan-small-business-reorganization-act (last visited Aug. 23, 2019).

[2] One of our members, Deborah Williamson, served as one of the 19 Commissioners.