Congress Makes it Easier for “Small Business” Owners to Retain Ownership After Bankruptcy

July 20, 2020

On February 19, 2020, Congress, when enacting The Small Business Reorganization Act (“SBRA”), (i) made it easier for “small businesses” to reorganize (as opposed to liquidating or selling their assets) and (ii) added a diligence requirement prior to filing “preference” actions.  The SBRA primarily created Subchapter V of the Bankruptcy Code (11 U.S.C. §§ 1181-1195), specifically for small businesses.

 

Changes to Chapter 11 Process 

Prior to the SBRA, filing for bankruptcy was cost prohibitive for a small business owner and it was unlikely that the owner would be able to keep ownership of the company.  The SBRA made significant changes to the Bankruptcy Code to make it both less expensive and easier for small businesses to file for bankruptcy and emerge from bankruptcy with ownership intact.

A “small business” under the original SBRA is one with less than $2,725,625.00 in debt.  Few businesses meet this criterion.  However, in the wake of the financial crisis brought on by COVID‑19, as part of the CARES Act, a “small business” is now a business with less than $7,500,000.00 in debt, greatly expanding the number of businesses that could take advantage of Subchapter V.  The increase in the debt limit is only temporary and expires on March 27, 2021.

As the following chart demonstrates, the SBRA increases the efficiency of a bankruptcy case, while also decreasing the costs (primarily attorneys’ fees) associated with a bankruptcy proceeding:

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Changes to Preference Law

The SBRA also added language to section 547 of the Bankruptcy Code to require a bankruptcy estate to undertake “reasonable due diligence” and consider “a party’s known or reasonably knowable defenses” before filing a complaint to recover monies paid within ninety days of a bankruptcy filing. These payments are commonly referred to as “preference payments” (see HERE for more information on preferences). Previously, there was no such formal requirement. 

It remains unclear whether this amendment will affect plaintiffs’ behavior; however, it has the potential to reduce the number of preference actions filed in the future.

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