Helping Small Business Owners in 2020
Excitement is not an emotion often associated with bankruptcy law; however, in 2019 the passage of the Small Business Reorganization Act (SBRA) created a new subchapter of bankruptcy which was designed to allow small businesses or small business owners to restructure their debts and emerge from bankruptcy, saving businesses, jobs, and even homes from foreclosure. This was exciting news for me as a bankruptcy attorney.
SBRA had an effective date of February 19, 2020. Shortly thereafter, an important additional provision was added to the enhancements provided by SBRA. The Coronavirus Aid Relief and Economic Security (CARES) Act was passed by Congress with overwhelming bipartisan support and signed into law by President Trump on March 27, 2020. The provision for debt limits was greatly increased to allow many more people to benefit from the new Subchapter V bankruptcy.
Chapter 11 Bankruptcy can help businesses or individuals reorganize their financial situation; however, it is an expensive process. In response to this burden, Subchapter V was added to Chapter 11 law. In a Subchapter V case, the debtor (small business or small business owner) was given additional “tools” to negotiate a deal with its creditors and, if negotiations break down, Subchapter V provides a simplified method of confirming a Chapter 11 Plan over a creditor’s objection.
Who is Qualified to File Under Subchapter V?
The SBRA set the debt limits for small businesses or small business owners at $2,725,625.
The CARES Act temporarily increased this to $7,500,000. So, if you file in 2020, you can have far more debt than SBRA allowed. The $7,500,000 limit has a sunset provision of one year, so don’t delay!
The definition of “small business debtor,” importantly, includes individuals who are “engaged in commercial or business activities” and whose debts are primarily business debts.
What Are Some of the “Additional Tools” to Successfully Emerge From Bankruptcy?
NO ABSOLUTE PRIORITY RULE IN SUBCHAPTER V:
The “absolute priority rule,” a guiding principle of Chapter 11, prevents the small business owner from remaining in control of his or her business after confirmation of the Chapter 11 Plan, unless all creditors are paid in full, creditors vote in favor of the Plan, or the owner contributes substantial new capital to the business to remain in control. Now, a Plan can be confirmed if the court finds that the Plan is fair and equitable to creditors – under the SBRA, a Plan is fair and equitable if it preserves the value of secured claims and dedicates all of a small business owner’s “projected disposable income” for the next 3-5 years to make Plan payments.
This is a very powerful tool because, simply put, creditors will have a much more difficult time obstructing confirmation of a Plan of reorganization. Confirmation (“approval by the judge”) can be an expensive process and hostile creditors often add to that burden by rejecting a proposed Plan. While a Plan could be confirmed over a creditor’s objection through a procedure known as “cramdown,” cramdown is typically quite time-consuming and expensive.
NO DISCLOSURE STATEMENT REQUIREMENT:
In a traditional Chapter 11 case, a Disclosure Statement must be filed with the Plan of Reorganization. Additionally, the Disclosure Statement must be approved before ballots can be served on the creditors. This is a time-consuming process for the attorney and thus an expensive element for the business owner who must pay the legal service fees of the attorney. By eliminating this requirement, the case will be less expensive.
SBRA also includes other potentially cost-saving provisions, but the elimination of a Disclosure Statement is the most impactful in terms of saving on attorney fees. The Subchapter V case is designed to confirm a Plan more quickly with less obstacles.
TRUSTEE TO BE APPOINTED IN EVERY CASE:
There will be a Chapter 11 trustee in every new small business case. The trustee will investigate the financial affairs of the debtor, appear and be heard at most of the hearings in the case, and collect for distribution to creditors the payments during the Plan.
The trustee is also instructed to “facilitate the development of a consensual Plan of reorganization.” In essence, this element of the trustee role will serve as a mediator, an advantage to the small business owners!
The trustee will be paid 5% of Plan payments. That is not a cost to the debtor as the payment comes out of money that would otherwise go to creditors. Another, advantage to the small business owner!
I have known both the local Subchapter V Trustees and have worked with them in multiple cases over the past decade. It is my opinion that their involvement will be of benefit to my clients in these cases.
MODIFY A SECURED PERSONAL GUARANTEE OF A BUSINESS LOAN:
A Subchapter V Plan can modify a personally guaranteed business loan which is secured by the small business owner’s personal residence. This can include an SBA loan!
Over my years as a bankruptcy attorney, I have discussed this issue with many business owners who have an SBA lien on their home. In the past, bankruptcy law did not allow the lien to modified. Now we can help in situations where the home is overly encumbered with liens. There are some restrictions to this; however, it is a powerful addition to the law available to help small business owners. This is a big deal!
Bert Briones, Certified Bankruptcy Specialist:
Bert Briones is the founder of Red Hill Law Group, a personal finance law firm. His experience in finance industries spans over 35 years. For over a decade he has represented individuals and small businesses in bankruptcy cases including successfully confirming Chapter 11 cases. He is certified as a Legal Specialist in Bankruptcy Law by the Board of Specialization of the State Bar of California. He is admitted to the Federal District Courts in California and has represented bankruptcy clients in the Central, Southern, Eastern and Northern Districts. Red Hill Law Group is located at 15615 Alton Parkway, Irvine California. Bert can be reached directly by telephone or text message at 949-527-3555 or at email@example.com.