New Alternative for Cheaper Small Business Bankruptcy
Updated: Apr 17, 2020
Chapter 11's high cost and complexity make it too difficult for small businesses to successfully reorganize. Congress has passed amendments to the Bankruptcy Code called the Small Business Reorganization Act (SBRA).
Before SBRA, businesses had two options: chapter 7 or chapter 11. On filing a chapter 7 case, a bankruptcy estate is created from the debtor's nonexempt property. A trustee is appointed to liquidate the assets of the bankruptcy estate and distribute the proceeds to the debtor's creditors. Chapter 7 is not an option if a business hope to survive bankruptcy and retain control of its operations.
A chapter 11 debtor keeps control over operations and restructures debt with a court-approved plan. Although the chapter 11 debtor retains control, it is subject to increased oversight from the bankruptcy court and the U.S. trustee. Its plan to repay debts must meet strict requirements and be approved by the bankruptcy court before the debtor can exit bankruptcy. While in bankruptcy, the debtor must get the court's approval of all transactions not in the ordinary course-of-business and must comply with monthly reporting requirements. As a result, a small business may not be able to afford the costs of a chapter 11.
SBRA strikes a balance between chapters 7 and 11. Under the SBRA, some debtors can retain control while reorganizing. However, they will no longer be subject to the more costly requirements of chapter 11. Unlike chapter 11, a trustee will be appointed to each small-business debtor case. The trustee will perform duties similar to those performed by a Chapter 13 trustee and help ensure the reorganization stays on track. SBRA also says a committee of creditors will not be appointed unless ordered by the bankruptcy court for cause. This will decrease the costs of a chapter 11. When a creditor committee is formed, it can hire its own professionals and the debtor is required to pay for them. The SBRA will now allow the small business debtor to avoid this additional expenditure.
Many of the SBRA’s amendments will streamline confirmation and potentially reduce confirmation costs. In a chapter 11 case, the debtor must file a disclosure statement with the bankruptcy court. It is a detailed document intended to tell creditors of key provisions in the debtor’s plan. It must be approved by the bankruptcy court before creditors can vote to accept the plan. Under the SBRA, a debtor will generally not be required to prepare a disclosure statement. In a chapter 11 case, the debtor’s exclusive right to file a plan is limited. Once this exclusivity period expires, creditors are free to file their own competing plans. The SBRA permits only the debtor to file a plan of reorganization. The SBRA’s elimination of a disclosure statement and potential competing plans will prevent contested hearings.
SBRA also relaxes plan confirmation requirements. First, the owners of small-business debtors can retain their ownership interest provided the plan does not discriminate unfairly and is fair and equitable. It is also easier for the small-business debtor to confirm a plan over creditor objections. Essentially, a plan will be confirmed as long as it provides that all projected disposable income for three to five years will be used to make plan payments. In addition, required plan contents under the SBRA are less stringent than those for chapter 11 plans.