SBRA - Creating A Meaningful Bankruptcy Option for Small Business Debtors

Article written by Heather Z. Cooper
Posted on Aug 19, 2020

“The Small Business Reorganization Act [SBRA] is a breakthrough for Main Street businesses to finally have the restructuring tools now available only to large companies.”

- Samuel Gerdano, Executive Director, American Bankruptcy Institute

In theory, Chapter 11 bankruptcy reorganizations preserve businesses and jobs while maximizing creditor recoveries.  In practice, this often is not the case for small and medium-sized businesses. Smaller sized businesses often file for Chapter 11 bankruptcy not to save their businesses, but rather to bring about an orderly termination. Thus, the Bankruptcy Code widely has been viewed as broken and unworkable for these types of businesses.

Chapter 11 has not previously been seen as a viable option for most smaller businesses for a host of reasons, principally because the Code (1) places unrealistic and arbitrary deadlines on small businesses; (2) imposes substantial and costly disclosure requirements; (3) requires complex restructuring strategies but fails to provide any tools to help small business owners create and implement them; and (4) makes it difficult for small business owners to maintain an ownership interest in their businesses upon emerging from bankruptcy.

 Enter the SBRA.  Enacted in February of 2019, and recently amended as part of the Coronavirus Aid Relief and Economic Security Act (CARES Act), the SBRA is designed to streamline the process for small business debtors to reorganize and rehabilitate their financial affairs. Broadly, the SBRA creates a new framework under which small business debtors may elect to file a Chapter 11 reorganization.  Given that it is located under Chapter 11 of the Bankruptcy Code (the chapter governing reorganizations as opposed to liquidations), a case commenced under the SBRA is referred to as a “Subchapter V Chapter 11.”

In order to qualify for relief under the SBRA, the Debtor must: (1) be engaged in “commercial or business activities” whose primary activity is not owning or operating a “single asset real estate,”  i.e., a single property or project, other than residential real property, with fewer than four residential units; (2) from which 50% or more of their debt arises (excluding debts to insiders, such as shareholders, and affiliates); and (3) aggregate noncontingent liquidated secured and unsecured debts of $2,725,625 or less.  The CARES Act raised the debt limit to $7,500,000 for one year (until March 27, 2021).

A Subchapter V has the following important features:

  • A Subchapter V trustee participates in each case while the debtor remains in possession of assets and operates the business.
  • Unique procedures apply.  For example, only a Debtor may file a Reorganization Plan under strict and accelerated deadlines (within 90 days from filing) and no disclosure statement is required.
  • A Plan may modify some residential mortgages if they were primarily used in connection with the business (other limitations also apply).
  • No committee of unsecured creditors typically is appointed.
  • No quarterly United States Trustee fees are required.
  • New “cramdown” rules are imposed, meaning that confirmation is permissible even if no impaired class of creditors accepts the proposed Reorganization Plan.
  • If the Plan is consensual, the Subchapter V Trustee is terminated upon substantial consummation of the Plan, once the Debtor begins to make the required payments under the Plan.  A discharge is entered upon Confirmation.
  • If the Plan is not consensual, the Plan can still be confirmed if (i) disposable income is directed toward Plan payments, (ii) the Court finds the Plan is feasible, and (iii) the Plan provides remedies if payments are not made.  There is no “absolute priority rule,” meaning that debtors (the business owners) can retain an ownership interest in their business post-confirmation.  The Subchapter V Trustee administers payments and the discharge is entered upon completion of the Plan.

The stated purpose of the SBRA is to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs. Hopefully, this new legislation will help our small businesses have a meaningful opportunity to use our (reorganizational) bankruptcy laws as intended, remaining in business through administration of bankruptcy and thereafter, benefitting not only the business owners but also their employees, suppliers, customers, and others who rely on that business.  If the SBRA and Subchapter V bankruptcies work as intended—and if small business owners take advantage of it—that undoubtedly will be good for our Main Street businesses, as well as the communities they call home.  If you are a struggling small business owner, you may be eligible for a more cost-effective, streamlined bankruptcy process under the SBRA.

 Heather Z. Cooper is a partner in Facey Goss & McPhee’s commercial litigation, bankruptcy and financial restructuring practice group.  She is a Board-Certified Consumer Bankruptcy Law Specialist by the American Board of Certification and has over twenty years of experience in the financial and restructuring industry.  Only 250 individuals nationwide have been selected to serve as Subchapter V private trustees under the SBRA.  Heather has recently been appointed as a member of the Subchapter V Trustee Pool for federal judicial districts of Vermont, and Northern and Western New York. If you are a small business or creditor who needs help, feel free to call Heather for assistance.   

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