Posted: April 9, 2020
The Small Business Reorganization Act (“SBRA”) became effective on February 19, 2020 and provides significant beneficial changes for small businesses that are contemplating filing for Chapter 11 protection. Through the SBRA: (i) the legal costs of reorganization dramatically decreased; (ii) the process of confirming a plan of reorganization was substantially simplified; (iii) eligibility to be a Chapter 11 debtor was broadened; and (iv) obtaining an Order of discharge of pre-petition debt can be obtained swiftly. Below is a brief summary; some of the concepts are complex and require further discussion.
DECREASED LEGAL COSTS. Unless a Court specifically enters an Order appointing a creditors committee, no committee will be appointed. A creditors committee is formed by a group of unsecured creditors who attempt to maximize the proposed distribution to creditors by a debtor. The debtor, however, is the party responsible to pay for all fees and costs of a committee’s legal counsel. The costs of those fees can be prohibitively expensive, and have often been the tipping point for the failure of an attempted reorganization. Under the SBRA, that will no longer be a barrier to successful reorganization.
SIMPLIFICATION OF PLAN CONFIRMATION. Under the SBRA, only a debtor may file a plan of reorganization. Under the old law, if the debtor did not file a plan within a certain time frame, any party to the case could file a plan, the terms of which could be economically devastating to the debtor, if not fatal. Furthermore, a debtor no longer has to file a disclosure statement in advance of the filing of the plan. This fact reduces a debtor’s legal costs related to the negotiation and the hearing on the adequacy of the proposed disclosure statement. The information historically required in a disclosure statement may now be included in the proposed plan of reorganization. Finally, a debtor under the SBRA does not need at least one impaired creditor class to vote to approve the plan, which previously was necessary. This will eliminate significant negotiations due to the fact that a debtor will not be required to increase distributions to appease that impaired class to vote to approve the plan.
BROAD ELIGIBILITY. Debtors are eligible (either a business or individual) if they are involved in a business and the aggregate debt does not exceed $2,725,625. However, under the CARES Act, that debt limit was increased to $7,500,000.00 for a 1 year window, due to the Covid pandemic. The most significant aspect is that debt under the SBRA does not include “contingent” or “unliquidated” debt. This means that if a claim (such as negligence or personal injury) has not been reduced to a judgment, it may be considered contingent and need not be included as a creditor eligible to be paid under the plan.
DISCHARGE ORDER. If the debtor obtains accepting votes on the plan from all impaired classes, that debtor receives its discharge order upon entry of the Order confirming its plan. This is significant, as that debtor will not have to wait years for the discharge of its pre-petition debt, and thus, all assets obtained subsequent to confirmation do not become property of the estate, subject to attachment by pre-petition creditors. If all classes do not vote to approve the plan, however, that debtor will not receive a discharge until 3 years after the first payment under the confirmed plan. This means that post-petition assets obtained by that debtor are not property of the business, rather they belong to the bankruptcy estate and must be allocated to payment of creditors.
Chapter 11 is a very complex legal process, with significant benefits for those small businesses in need of its protection. It is critical that you consult with an experienced bankruptcy lawyer to go over all of your options and to understand your rights. Kirschenbaum & Kirschenbaum has over 45 years’ experience in dealing with all bankruptcy matters. Please contact one of our attorneys today.
For assistance with all Bankruptcy matters, please contact us:
Ken Kirschenbaum, Esq. (516)-747-6700 Ext. 301 or
Stacy Spector, Esq. (516)-747-6700 Ext. 304 or