Advantages of the Small Business Reorganization Act vs. A Standard Chapter 11
The Small Business Reorganization Act is a new law designed to make it easier and quicker for small businesses to file for Chapter 11 bankruptcy. Chapter 11 is often thought of as being long, intrusive, costly, and drawn out, and to some extent, for large multimillion dollar companies that file for reorganization, that can be true.
But the new law changes all of this. What are the differences between filing for bankruptcy under a traditional Chapter 11 and filing for bankruptcy under the Small Business Reorganization Act?
Qualifying Under the New Law
To qualify for the Small Business Reorganization Act, a debtor must have less than $2,556,050 (temporarily increased to $7,500,000.00 through March 27, 2022) in debt. Contrast this to a traditional Chapter 11, where there is no maximum debt limit. Additionally, the filing party has to be in business, but cannot be in business as shopping centers, office buildings, warehouses, apartment complexes, or any business that makes most of its money from real estate, such as operating rental properties.
The Trustee’s Role is Increased
In a traditional Chapter 11 case, the US Trustee has simply an oversight role, and normally takes a pretty passive role. But the trustee is more active under the new law.
The debtor will have to have an interview with the trustee in the first 60 days to see if the business is able to continue operating after the bankruptcy, and to make sure that the debtor understands their role during the course of the bankruptcy.
In a Subchapter V, a Trustee is appointed to help the debtor develop a reorganization plan and negotiate with creditors.
The Reorganization Plan
Unlike in a traditional Chapter 11, in a Subchapter V, a court can approve of your reorganization plan even if no creditors approve of it. In fact, in the new law, there are no creditors’ committees. This saves money and time, and puts more power in the debtors hands as opposed to the creditors.
The plan will require disposable income for three years be made to pay creditors (similar to a Chapter 13 bankruptcy). Disposable income means income not needed to operate or maintain the business. The Court will also require that the plan treats all creditors fairly and equally.
The disclosures with the plan that must be made to creditors are limited, and are much less than what would be made under a traditional Chapter 11 case.
Expenses Are Spread Out
Just like in a normal Chapter 11, under the new Reorganization Act, there will be administrative expenses. However unlike in a traditional Chapter 11, when all those fees must be paid at the time the proposed plan is approved of, the new law allows those expenses to be paid over the course of the entire plan.