In the fall of 2019, Congress enacted the Small Business Reorganization Act of 2019 which is designed to streamline the efforts of small businesses to restructure their debt under Chapter 11. The specific highlights of the new law includes a Sub-Chapter V to Chapter 11:
Congress defined a “small business debtor” as a business entity or an individual which is engaged in business whose aggregate non-contingent debts (excluding debts to affiliates or insiders) do not exceed $2,725,625 and which elects to be treated as a small business.
Only the small business may file a Chapter 11 plan, but the Act requires that the debtor file its plan within 90 days of the date it files its bankruptcy petition, except in certain circumstances;
A standing trustee similar to those appointed in Chapter 13 cases will be appointed to oversee each small business case;
A creditors committee will not be formed;
The Chapter 11 plan can modify the rights of a creditor secured by a security interest in the debtor’s principal residence if the loan secured by the residence was not used to acquire the residence but was used in connection with the debtor’s business;
The Court can confirm a debtor’s plan without the support of any class of claims as long as the plan does not discriminate unfairly and is deemed to be fair and equitable with respect to each class of claims;
To be fair and equitable, the Chapter 11 plan must provide that all of the debtor’s projected disposable income to be received during the length of the plan will be applied to make payments under the plan for a period of 3 to 5 years.
In light of the recent pandemic, small businesses in every industry, primarily in the energy and related fields, will be facing tremendous strain on their operations. Before Congress enacted this legislation, many businesses were forced to liquidate given the high costs of professional fees and expenses and the inherent delays of a formal Chapter 11 case. Now there is the possibility of preserving the value of many of these businesses through the small business option under Sub-Chapter V of Chapter 11.
* James B. Jameson is Of Counsel at Seltzer, Chadwick, Soefje & Ladik, PLLC. He has more than 35 years of experience representing business clients in the area of bankruptcy law. He can be contacted by telephone at 713.807.1705 or by e-mail at firstname.lastname@example.org.