Utilizing Chapter 11 Bankruptcy To Save Your Small Business
Small Business Bankruptcy: Chapter 11
Chapter 11 of the Bankruptcy Code gives an opportunity for individuals and business entities that are experiencing financial difficulties to reorganize their debt. Traditionally, the Chapter 11 bankruptcy process has been cumbersome and very expensive making it an impractical option for otherwise cash strapped small businesses struggling to keep the doors open.
In order to make Chapter 11 more practical and affordable, Congress passed the Small Business Reorganization Act (“SBRA”) which became effective on February 19, 2020. Specifically tailored to small businesses, including individuals who fall within the definition of a small business, the SBRA may provide a lifeline to help small businesses survive.
What is the SBRA?
The SBRA created a more efficient and less costly process for small businesses to reorganize under Chapter 11 of the United States Bankruptcy Code. The SBRA, also known as Subchapter V of Chapter 11, removed many barriers that had prevented small businesses from using the Bankruptcy Code to reorganize their business.
SBRA Debt Limits
As enacted, the SBRA applied to businesses with debts not exceeding $2,725,625. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) markedly increased the debt limit to $7.5 million. This increased debt limit is temporary and currently expires on March 27, 2022 when the debt limit will return to $2,725,625.00.
How Does the SBRA Work?
The SBRA has made it easier, faster and less expensive to use bankruptcy to reorganize your small business. In a Subchapter V Bankruptcy, a Plan is filed providing for catching up on missed rent, mortgage, equipment leases and/or secured bank debt. The Plan also provides for the payment of some or all of the amounts owed to vendors or other unsecured creditors. The Plan must provide for payments over a period of three years. If necessary, the Plan can be extended to up to 5 years. The Plan payments are made from future business income.
The Bankruptcy Court must approve the Plan. In certain cases, the Court can approve the Plan even if the creditors do not agree with it. After the Plan is completed all remaining business debts are discharged. Discharged debts are no longer owed.
What Businesses Can Benefit from the SBRA?
A Small Business bankruptcy may be a viable option for businesses that can meet ongoing obligations but need time to address past due obligations including rent and loan payments. It may provide the only opportunity for a small business facing the threat of a judgment for eviction to stay in its premises and continue ongoing operations.
The lawyers at Levitt & Slafkes, P.C. have successfully reorganized debtors under the SBRA. Reach out to learn more about how the SBRA may be able to address your needs.