Small businesses that are unable to pay their debts have the option to file bankruptcy under Chapter 11 of the Bankruptcy Code to reorganize their businesses and debt obligations. Recent changes to the Bankruptcy Code are designed to make it easier for small businesses to reorganize.

            In August of 2019, the Small Business Reorganization Act was enacted with the goal of streamlining and making less expensive the reorganization process. Initially a debt limit of $2,725,625 was established for small businesses. More recent legislation in March 2020, increased the debt limit to $7.5 million to make small business reorganization more available.

FEATURES OF SMALL BUSINESS REORGANIZATION CASES

Appointment of a Trustee. A trustee is appointed who has a supervisory role to facilitate the reorganization and to administer the plan of reorganization. The trustee is compensated through payments under the plan of reorganization.

Conduct of the Business. After a bankruptcy case is filed the small business debtor will continue to operate the business with the debtor seeking court approval for certain actions taken during the case.

The Plan Approval Process. To streamline the reorganization process the bankruptcy court will hold a conference within 60 days to the bankruptcy filing date and the debtor is to file a plan within 90 days of the bankruptcy filing date. Unlike a typical Chapter 11 case, there is no requirement for a separate disclosure statement to be filed or approved by the court. Instead, the plan of reorganization is to provide a history of the debtor’s business operations, liquidation analysis, and plan projections. Only the debtor may propose a plan of reorganization.

Elimination of the New Value Rule. One of the impediments in a typical Chapter 11 case is the rule that prevents equity holders or owners of a business from retaining their equity unless all creditors are paid in full. The new Act eliminates this special rule and allows small business owners to retain their ownership interests without paying all creditors in full.

Payment of Administrative Expenses. In a typical Chapter 11 case, the debtor is generally required to pay administrative expenses, which are claims incurred by the debtor for post-bankruptcy filing goods and services, on the effective date of the plan or reorganization. Under the new Act, the small business debtor may pay administrative expenses over an extended period of time.

Discharge Limitations. A debtor may receive a discharge which relieves the debtor of personal liability for all debts provided under the plan, with some exceptions. The discharge is granted after completion of all payments due within 3 years under the plan, or a longer period not to exceed 5 years. There are also exceptions to discharge that apply for certain debts.

If you own or operate a business facing financial difficulties, and would like to discuss your options, Dudley and Smith, P.A. has attorneys who can represent you in this area of debt reorganization. Steven C. Opheim has 35 years of experience representing small businesses. Please contact him to discuss your case.

The law is continually evolving and Dudley and Smith, P.A.’s blog posts should not be relied upon as legal advice, nor construed as a form of attorney-client relationship. Postings are for informational purposes and are not solicitations, legal advice, or tax advice. A viewer of Dudley and Smith, P.A.’s blog should not rely upon any information in the blog without seeking legal counsel.