Small Business Reorganization Act of 2019 helps small businesses reorganize

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Act) in an effort to make bankruptcy reorganization of small businesses more effective. Recently, Congress recognized that the 2005 Act did not do enough and “…while most Chapter 11 cases are filed by small business debtors, they are often the least likely to reorganize successfully.”¹

Similarly, Congress found that the Bankruptcy Code has Congress recognizing that while the Bankruptcy Code envisioned creditors actively monitoring Chapter 11 cases, the practical result showed claims involved were too small for creditors to devote the time and money necessary to actively be involved.²

To make small business bankruptcies more efficient by streamlining existing procedures and mitigating traditional Chapter 11 difficulties, the Small Business Reorganization Act of 2019 (2019 Act) created a new subchapter, subchapter V, to Chapter 11 of the Bankruptcy Code.³ Effective Feb. 22, 2020, the 2019 Act classifies a small business debtor as one with an aggregate of secured and unsecured debts not exceeding $2,725,625.⁴ A debtor that qualifies as a small business debtor has the option to proceed under subchapter V or the traditional Chapter 11 provisions of the Bankruptcy Code. The 2019 Act includes numerous changes applicable to subchapter V, the most of which notable are:

Appointment of trustee

Unless there is cause for the court to order, a trustee will be appointed by the U.S. Trustee instead of the creditor’s committee.⁵ The trustee will oversee and facilitate the debtor’s reorganization plan, manage the accounting of debtor’s property, oversee distributions and object to claims.

Debtor friendly

Only the debtor can file the reorganization plan, which must be done within 90 days from the filing of the bankruptcy.⁶ In addition, the debtor no longer must have a disclosure statement filed and approved by consenting creditors before soliciting plan approval. The 2019 Act also requires a status conference be held within 60 days of the petition date, which helps streamline the process.

Owner’s stake is preserved

Unlike the traditional Chapter 11 where a debtor must contribute to the plan to maintain their equity interests, the 2019 Act allows a small business owner to keep a stake in the business as long as they do not discriminate unfairly and remain fair and equitable with respect to each class of claims.⁷

Mortgage modifications

Perhaps one of the most notable changes is that the 2019 Act removes the provision which prohibited small business owners from modifying their residential mortgages. The 2019 Act will allow a small business debtor to modify a mortgage secured by a principal residence if the underlying loan was not used to acquire the residence and was primarily used in connection with the small business of the debtor.⁸

Discharge limits

If the trustee or an unsecured creditor objects to the reorganization plan, the court cannot approve it unless the debtor’s disposable income, that is, the income reasonably necessary for the continuation, preservation or operation of the business debtor, will be applied to making payments under the plan for at least three but no more than five years.

Upon payment under the plan, the debtor is relieved of personal liability except in the following instances:

• The last payment of the debt is due after the first three years (or later as ordered by the court); and
• The debt is otherwise non-dischargeable, including under Section 523(a) of the Bankruptcy Code, which is atypical for a corporate Chapter 11 bankruptcy.         

Chuhak & Tecson, P.C.’s  team of attorneys experienced in creditors’ rights and bankruptcy matters continually evaluate the numerous changes of the 2019 Act prior to its effective date of Feb. 22, 2020. For more information regarding the act or Banking litigation matters, contact a Chuhak & Tecson Banking attorney.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: Francisco E. Connell, Principal