SBRA - subchapter V

When the Small Business Reorganization Act (SBRA) was first signed in August 2019, it was slated to go into effect in February 2020. However, no one dreamed that the economy of the United States would skid to a painful halt as the world faced a historic pandemic.

Sadly, the financial consequences resulting from COVID-19 are devastating for many small businesses.

The SBRA might prove to be a lifeline for many of the small businesses that are trying to stay afloat.

According to the U.S. Trustee Program director the SBRA represents an innovative effort to expedite and reduce the cost of bankruptcy for small business debtors to reorganize their debts and save their businesses.

Under the Small Business Reorganization Act certain debtors are able to voluntarily elect to proceed under a new subchapter V of chapter 11 of the Bankruptcy Code.

How Subchapter V Can Help Small Businesses Reorganize Their Debt

Subchapter V was designed to promote an efficient and economical way for small businesses to reorganize their debts.

Under Subchapter V, a debtor can opt to spread their debt over the next 3 to 5 years.

This lets the debtors recover and pay their creditors because they can realistically expect to have eventual income.

This section differs from a normal Chapter 11 which states that debt must be paid at the plan’s formation but with Subchapter V the debts are not discharged until every plan payment has been made.

For a small business to be eligible for Subchapter V, whether an individual or an entity they must be involved in commercial activity.

The total secured and unsecured debts must be less than $2,725,625.

At least half of the debt needs to come from business dealings which cannot be a single-asset real estate operation.

The CARES Act Increased the Debt Cap

On March 27, 2020, as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress increased the Subchapter V cap to $7,500,000 until March 27, 2021.

The goal was to provide relief for not only small business owners but also their customers, employees, creditors, suppliers, and the U.S. economy.

Small businesses in the United States are facing extreme hardship because of COVID-19.  Reorganization is just one way a business can possibly stay afloat and gain time from their obligations so they can negotiate with creditors, lenders, and landlords until they can resume normal operations.

The Subchapter V Process

Unlike traditional Chapter 11, the process for Subchapter V is impressively fast.

Reorganization will start with filing documents such as the bankruptcy petition, a balance sheet, a statement of operations, federal tax returns, and cash flow statements.

With the Subchapter V, a trustee is always automatically appointed but the debtor continues to control assets and all operations. A creditor committee is only used if there is cause to do so.

Subchapter V trustees can investigate all financial affairs of the debtor, but their actual function is to create a consensual plan between the debtor and the creditors. In many ways, they act as a mediator.

Without a doubt, an impartial third-party ensures a fair and highly equitable resolution between the debtor and the creditors. The debtor must pay the Subchapter V trustee.

With the current financial crisis, this could prove beneficial for a small business that has creditors who are not willing to make reasonable concessions.

A Court conference is held within 60 days following filing.

About 14 days prior to the conference, the debtor is required to report in writing all efforts that have been made or will be made to create a consensual plan.

In addition, the debtor (only the debtor and no other) will need to file a reorganization plan within 90 days after filing.

A disclosure statement does not need to be filed as an alternative, a plan that includes a brief history of the entire business operation, plus liquidation analysis, and all projections must be included in the proposed plan of payments.

A plan can be laid out without needed the acceptance of the creditors (unlike Chapter 11).

There is also an option for projected disposable income which lets a payment plan over the next three to five years be included. A projected disposable income covers everything needed to maintain, support, and expenditure the business operations.

The plan receives a confirmation when the debtor shows that they can make the required payments laid out in the plan and also meet the remedies that are put in place to protect the creditors in the event that payments are not made.

With a consensual plan, the debtor will receive a discharge at confirmation.  However if there is not a consensual plan, the debtor will receive a discharge when they complete all the plan payments.

Contact Bankruptcy Attorney Gregory Oberhauser

When a small business is deciding to reorganize their debt they should consult with Bankruptcy Attorney Gregory Oberhauser who can better advise them of the entire process.

Subchapter V helps to soften the blow to small business owners who could have faced personal consequences under Chapter 11.

Another plus is that Subchapter V does away with the new value rule which required equity holders to offer up a new value to retain their equity interest in their business.

If your business is in trouble contact Oberhauser Law to schedule a consultation to speak with Attorney Oberhauser.