Benefits of the Small Business Reorganization Act
Historically, Chapter 11 bankruptcy has been thought of as a long, laborious and time intensive process. Certainly, like any legal area, there are some cases that can be complex, and go on for an extended amount of time. But in 2019, Congress passed a new law, the Small Business Reorganization Act, designed to make Chapter 11 bankruptcy easier and quicker for many businesses.
Quicker and Easier
The law, which went into effect in February 2020, allows a debtor to obtain a Chapter 11 bankruptcy quicker and more efficiently than ever before. To qualify, the company or debtor must have less than $2,725,625 in debt, with the majority of that debt coming for business expenses.
The law makes Chapter 11 not only quicker, but less expensive. For example, the debtor no longer has to pay trustee’s fees, the way it would in a traditional Chapter 11 case. Unlike a traditional case, where there is a creditor’s committee, there is no such committee under the new law (but one can be appointed upon a motion by the trustee or any creditor).
Filing the Plan
The new law only lets the debtor file a plan of reorganization, unlike a traditional case, where any creditor can propose a plan. Additionally, whereas in a traditional case, at least one impaired class of creditors must approve of a plan, in the modified case, a proposed plan can be approved by a court, without approval of any single creditor class.
The new Chapter 11 also assists business owners who may have mortgaged their homestead property, and used the proceeds of the mortgaged loan to pay business expenses. In other words, if the purchase is not a purchase money mortgage, then the debtor can modify the mortgage on their principal residence through the bankruptcy case.
Modifications of the Plan
Normally, after a plan is approved, any creditor can move to modify the Chapter 11 plan to increase the payment amounts, extend the time allotted to make required payments, or to alter what any one credit receives through the plan. But in the modified plan, only the debtor can seek to modify the plan.
That avoids the common Chapter 11 scenario where a plan is approved, a business keeps operating and improves, and based on that improvement, a creditor tries to increase payments owed under the plan.
Often, administrative costs of the plan must be paid by the debtor, and that money is often due at once, or upon approval of the plan. But in the modified Chapter 11, those payments can be spread out through the life of the plan in some cases.
A major expense—payment of trustee’s expenses—may be less, because in the modified small business case, the trustee will not operate the debtor’s business, as the trustee often does in a traditional Chapter 11 case.