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Significant Changes to the Bankruptcy Code Provide Relief to Small Businesses

February 1, 2020 Posted in Legislative Update Share

Effective February 2020, Congress enacted the Small Business Reorganization Act of 2019 (“SBRA”), which amended the U.S. Bankruptcy Code and now gives small businesses a meaningful opportunity of reorganizing their financial affairs under Chapter 11 of the Bankruptcy Code. SBRA added a new Subchapter V to Chapter 11 of the Bankruptcy Code to allow small businesses to reorganize without completely going out of business. Previously, Chapter 11 proceedings were too expensive and complicated for most small businesses. Now, small businesses, which includes individuals or business that are engaged in commercial business activities and have a total debt of less than $2,725,625, may continue to operate their business while they repay their debts over a three to five year period. Key components of the SBRA include:

• The SBRA eliminates the requirement for a disclosure statement.
• The SBRA makes it easier for a small business to obtain approval of its reorganization plan over creditors’ objections by permitting a bankruptcy court to approve a plan even without creditor support as long as it is “fair and equitable” and does not “discriminate unfairly” against classes of creditors.
• The SBRA allows a small business debtor to modify the rights of a creditor who has a security interest in the debtor’s principal residence, as long as the loan secured by the principal residence was not used to acquire the residence but was used in connection with the debtor’s business.
• The SBRA eliminates the quarterly fees that must be paid to the United States trustee based on disbursements under Chapter 11. February 1, 2020.