New options for small business bankruptcies

Changes went into effect in February to ease the burden for smaller businesses seeking relief through the bankruptcy process.

The Small Business Reorganization Act of 2019 (SBRA), P.L. 116-54, passed by Congress and signed into law by President Donald Trump last August, allows small business debtors with debts of less than approximately $2.7 million to reorganize under a bankruptcy process that allows more flexibility in negotiating restructuring plans. The newly outlined option for Chapter 11 bankruptcies — called Subchapter V — includes court-approved trustees, which previously weren’t always appointed in small business bankruptcies, to work with the debtors on how to resolve outstanding bills with creditors and reorganize the business. It eliminates the appointment of a committee of unsecured creditors for Subchapter V cases, unless the bankruptcy court orders otherwise for cause.

“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 business,” Cliff White, the director of the U.S. Trustee Program, said in a written statement. The trustee program is a division under the U.S. Justice Department that oversees the administration of the bankruptcy process and litigates where appropriate.

The law went into effect Feb. 19, and the Justice Department has already selected 250 people with accounting, legal, and business backgrounds to serve as trustees for these new types of bankruptcy reorganizations.  

CPAs should be aware of the changes, to understand how they could affect their business clients.

Here, we answer some of the basic questions about the new law.

Who is affected? Small business owners with debts under $2,725,625 are eligible, with some exceptions. At least 50% of the debt must have arisen from the debtor’s commercial or business activities.

What does it do? The SBRA created an additional track in Chapter 11 bankruptcies that small business debtors can opt into. This track sheds some of the requirements regarding how restructuring plans are negotiated with creditors, has expedited deadlines, and allows for more flexibility in negotiations with creditors, according to the Justice Department. It’s expected to reduce the regulatory burden and, therefore, the costs of small businesses seeking bankruptcies. 

Under Subchapter V, every small business debtor will have an appointed bankruptcy trustee, who will “facilitate the development of a consensual plan of reorganization” (11 U.S.C. §1183(b)(7)) and ensure that the debtor makes timely payments under the plan.

Unlike other Chapter 11 cases, only the debtor — and not the creditors — can propose a reorganization plan under Subchapter V. The reorganization plan must be filed within 90 days of the commencement of the case.

Because there is no creditors’ committee, Subchapter V eliminates the requirement that “impaired” creditors — creditors who will not be paid in full — must approve the plan in order for owners to retain their companies, which should make it easier for small-business owners to reorganize instead of liquidating, according to business columnist Gene Marks. 

What’s expected to happen? Bankruptcy attorneys expect to see more business owners saddled with debt seek relief through this process, given that the new Chapter 11 option will reduce the cost and burden of bankruptcies.

— Sarah Ovaska is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA senior editor, at Chris.Baysden@aicpa-cima.com.