The Small Business Reorganization Act of 2019 (SBRA) was sponsored by Senators Grassley, Whitehouse, Tillis, Klobuchar, Ernst, and Blumenthal and signed into law in August 2019. It then became available to small business owners in February 2020 just a month before the devastating financial impact created by the COVID crisis.
While the timing could not have been more fortuitous, most small business owners don’t know about it and how it can help their business. We hope to change this through education and resources that business owners can take advantage of as they work through their financial challenges.
To get started, find out more about the SBRA, who qualifies for it, and how the process works.
What is the Small Business Reorganization Act of 2019?
Aside from making filing for Chapter 11 bankruptcy easier, the SBRA also made it easier for business owners to qualify for it, increasing the allowance for total debt from $2.7 million to $7.5 million under the CARES Act. While this increase will revert back to $2.7 million on March 28, 2022, it still allows more business owners time to take advantage of it.
According to the senators sponsoring the act, Chapter 11 was designed for administering complex business reorganizations involving multimillion dollar companies. Despite containing several provisions specifically focused on small business debtors, a significant amount of research shows that Chapter 11 may still be difficult for small business owners. Some of those challenges include high costs, monitoring deficits, and procedural roadblocks.
To address these issues, the SBRA adds a new subchapter V to Chapter 11, leading to more successful restructurings, reducing liquidations, and increasing recoveries to creditors.
The Small Business Reorganization Act also streamlines existing bankruptcy procedures and provides new tools to increase a small business owners’ ability to achieve a successful restructuring.
Here’s a short 3 minute video from Harvard Business School on how it works.
Who Qualifies for the Small Business Reorganization Act?
Please note: it’s important that you speak with qualified legal counsel before pursuing any bankruptcy process. This post was created to make sure business owners struggling to recover are aware of the availability of this relief. If this seems like an option you’d like to learn more about, we encourage you to seek legal advice from a qualified attorney. Many attorneys will provide initial consultations at little or no cost.
The Small Business Reorganization Act of 2019 was signed into law in August 2019 and became effective in February 2020.
At that time, any business debtor with non-contingent, secured and unsecured debt of less than $2,725,625 could elect Subchapter V treatment provided for under the SBRA.
On March 27, 2020, as part of the CARES Act, the debt threshold was increased to $7.5 million for a year or until March 27, 2021. On March 27, 2021 as part of the COVID-19 Bankruptcy Relief Extension Act of 2021, Congress extended the date for an additional year or until March 27, 2022. At that time, the debt threshold will revert back to the $2.7 million level.
Aside from the debt limit, the following companies may not file for bankruptcy under the SBRA:
- Companies with affiliates that exceed the debt limit
- Public companies or any affiliate of a public company
- Shopping centers
- Office buildings
- Industrial/warehouse buildings
- Apartment complexes
- Any small business that generates substantially all of its gross revenues from the operation of a single real estate property or project (that has at least four residential units)
How Does Reorganization Work?
The US Courts site has some of the clearest explanation of the process. Read their breakdown on filing for Chapter 11 bankruptcy to dig into the details.
Here are some of the highlights from their post under the section entitled: The Small Business Case and Small Business Debtors.
- Small businesses have access to two paths when filing for Chapter 11 reorganization.
- Small Business Case
- SBRA or Section V
- The maximum level of debt under both was previously $2,725,625. However, under the CARES Act, the limit for SBRA filings was raised to $7,500,000 through March 27, 2022. At that point in time, it will return to the $2,725,625 level.
- Note in reading some articles about this limit, there have been cases where unscrupulous lenders have found ways to increase debt so it’s close to the threshold limit. In turn, that would push debtors over the limit so they are unable to claim. If your business is close to the maximum amount, make sure to pay attention to that.
- Section V has an accelerated process for filing and resolution.
- In both cases, you will need to present a full set of financial information along with your tax returns with your filing.
- A trustee is then named to your case who you work through the details with, and they ensure the payments you agreed to are made.
- The plan arrived upon with the trustee and the courts need not be approved by the creditors under the SBRA.
- Again: Please speak with legal counsel to gain a complete understanding of the process.
What Are the Key Steps in the Process?
There are about six steps in the process you’ll go through if you decide to proceed.
Meet with an attorney to discuss your options and put together paperwork. That paperwork includes:
- Bankruptcy petition
- Financial statements (schedules of assets and liabilities, income statement)
- List of all creditors
Create a reorganization plan with your attorney, even before you file. A plan typically includes:
- How much and how each creditor will be repaid.
- Schedule of payments: a Subchapter V case has a 3-5 year repayment plan, in which the business pledges some of its cash flow over those 3-5 years to repay creditors as much as possible.
- Any major operational changes that will be made to the company (e.g., if the business will sell any assets, move locations, give up leases, etc).
File for bankruptcy along with the paperwork.
Attend a status conference within 60 days of filing. This is a pre-cursor to filing the reorganization plan. It’s a chance for everyone to connect, make sure things are moving along, and confirm that the plan is coming together.
File your plan of reorganization within 90 days of filing: This is the plan that you’ve discussed with your attorney. After that, a trustee and judge will examine the plan and approve it or request modifications.
What is a trustee?
A trustee is a person appointed by the court to ensure that the process is fair and that creditors are getting the highest recovery possible. They play a major role in Subchapter V bankruptcies by stepping in and representing the creditors, in lieu of allowing the creditors to vote on the reorganization plan.
Once the plan is approved, the business exits bankruptcy and makes payments according to the plan for the next 3-5 years. At the end of that period, any remaining debt that existed before the bankruptcy is discharged, and the business no longer owes this debt.
How Long Does the Bankruptcy Process Typically Take?
On average, a regular Chapter 11 bankruptcy takes 12–24 months. However, the new SBRA Subchapter V bankruptcies have deadlines that allow cases to move faster.
More specifically, the bankrupt firm has to submit a plan of reorganization within 90 days of filing. After this point, the court will approve the plan, which might take another month or so. Then, the bankruptcy is essentially finished. So, a regular timeline for Subchapter V small business bankruptcy is roughly 4-6 months.
How Much Does Chapter 11 Bankruptcy Typically Cost?
It varies a lot, especially because Subchapter V is new, so there’s no good data on how much attorneys are charging for this. However, we do know that cost will be dependent on the quality of the lawyer and how complicated the case is.
While the filing fees aren’t high (in the range of a few hundred dollars), the attorney fees will be the majority of the expense. As attorneys charge by the hour, the more complicated your business is, the more expensive it will be. A very rough ballpark might be $5,000–$30,000 in attorney fees for most small businesses.
When you first meet with an attorney, make sure to discuss the cost upfront so you know what to expect.
Connect With Bankruptcy Lawyers on Alignable
While not an exhaustive list, you can find lawyers specializing in bankruptcy law here or do a search on Alignable. While we can’t speak to the level of expertise of each attorney on the platform, you can find a list of potential people to connect with to learn more about their services.
We also asked bankruptcy attorneys on Alignable to share their experiences with the Small Business Reorganization Act of 2019. Read their responses and connect with them directly.