In February 2020, the Small Business Reorganization Act (“SBRA”) went into effect, bringing some dramatic changes to the Chapter 11 bankruptcy process for small businesses. The law is codified at subchapter V of Chapter 11 of the Bankruptcy Code and the small business cases are sometimes called subchapter V cases. The purpose of the legislation was to remove some of the impediments in the Bankruptcy Code that prevented smaller businesses from being able to successfully confirm plans of reorganization and to make the process faster and more efficient for smaller bankruptcy cases.
First, to be eligible to file under the SBRA, the debtor must qualify as a “small business debtor” which means that it has non-contingent, liquidated debts of less than $2.75 million, at least half of which arose from the debtor’s business or commercial activities. Under the recently passed CARES Act, for one year the debt limit is increased to $7.5 million. Single-asset real estate cases are still treated under their own provisions of the Bankruptcy Code and they are excluded from the definition of “small business debtor”.
Immediately upon the filing of the bankruptcy case, the Office of the United States Trustee will appoint a subchapter V trustee. The subchapter V trustee is a neutral party whose primary concern is to monitor the debtor’s progress through the bankruptcy case and facilitate discussions with creditors in hopes of achieving a consensual plan of reorganization.
There are fairly short deadlines for many of the major requirements in a subchapter V case. The First Meeting of Creditors is held very promptly and a scheduling conference will be set by the Bankruptcy Court within 60 days of the case being filed. The debtor’s proposed plan of reorganization has to be filed within 90 days of the entry of an order for relief. (In a voluntary bankruptcy, the Petition is the order for relief. In an involuntary bankruptcy, the Court enters an order allowing the Petition, which triggers this 90-day deadline.)
In a subchapter V case, there are fewer requirements for a plan of reorganization. While the goal of a subchapter V case is to negotiate a consensual plan that is acceptable to the creditors and feasible for the debtor, the debtor has greater ability to “cram down” a nonconsensual plan compared to a traditional reorganization case. The Bankruptcy Code seems to contemplate that small business debtors will make payments their creditors in 3-5 years, although those terms are not mandated. As in non-small business chapter 11 cases, the creditors have an opportunity to vote on the plan of reorganization.
In a typical Chapter 11 case, the debtor does not receive a discharge unless and until it pays all its creditors in full (in which case, the discharge is a mere formality since there is no outstanding debt for any creditor to collect), but in a subchapter V case, the debtor can receive a discharge in as little as 3 years if it makes all its payments under the plan of reorganization.
By making business bankruptcy simpler, faster, and less expensive for small businesses, it is hoped that more small businesses will be able to benefit from the protections of the bankruptcy code and remain operating. Time will tell whether the changes implemented by subchapter V are sufficient to realize that goal.