The Small Business Reorganization Act
The Small Business Reorganization Act, also called the "SBRA" or "Subchapter V," is the newest section of Chapter 11 of the Bankruptcy Code, and took effect on February 19, 2020. Unlike most of the provisions of Chapter 11, which were designed to help big business, the SBRA was enacted specifically to provide Main Street business debtors, both individuals and corporations, with a more streamlined path for restructuring their debt.
When the SBRA became effective in February 2020, few saw that within a month the worldwide economy would grind to a halt as a result of a global pandemic.
The coronavirus changed everything.
Layoffs, closures, and social distancing, while necessary for public health, have had a devastating impact on businesses. Businesses that were thriving saw things change overnight. And companies already on the edge saw that edge get even closer. Your business was closed. Employees were told to stay home. Supply chains dried up. Customers disappeared. Regardless of your situation, and despite everything that had worked so hard for, your financial picture was suddenly changed, forcing you to look at things in a new light.
The SBRA is designed to help. Initially, it let an individual or business with less than $2,725,625 in debt take advantage of its provisions. In response to the economic distress caused by the COVID-19 coronavirus pandemic, Congress passed CARES Act on March 27, 2020, which increased this limit to $7,500,000 for the next year.
As in a regular Chapter 11 case, once a SBRA case is filed, the Automatic Stay goes into effect. The Automatic Stay immediately stops most collection actions, including collection calls and letters, bills, foreclosures, lawsuits, garnishments, bank attachments, even IRS levies.
Much like a Chapter 13 case for individuals, the SBRA lets you spread the repayment of your debt out over 3 to 5 years, and you must devote your disposable income to the repayment plan. Debts are not discharged, or wiped out, until you finish all of your plan payments.
You usually need to file your reorganization plan within 90 days after filing, but the Court may extend this time.
Unlike a traditional Chapter 11, under the SBRA, the Court appoints a Bankruptcy Trustee, even though you keep control over your assets and operations. Although the Trustee has the authority to investigate your financial affairs, their main job is to oversee the case and provide input to the Court.
One new feature of the SBRA is the ability to modify a refinance or second mortgage on your residence used to fund the business. The SBRA also eliminates the Absolute Priority Rule, which normally requires business owners to provide “new value” if they want to retain their equity interest in the business.
The SBRA is a specialized type of Chapter 11. You need to make sure that your attorney is experienced both in Chapter 11 and the new provisions of the SBRA.
Brett Weiss is a sought-after lecturer at the national level, who has spoken frequently about the SBRA, its provisions, and the changes is has made to Chapter 11. He knows its ins and outs, and how it works in the real world. He can help you navigate through it to save your business. Let us know if we can help.