Effective February 2020: New Changes to Bankruptcy Law Will Help Small Businesses

For further information on small business bankruptcies, please contact Lisa Stevens at [email protected] or 443-569-0795.

Deciding to declare bankruptcy is never an easy choice. For small-business owners who wish to keep their companies and reorganize the debt, the decision is even harder because, under the current chapter 11 laws, the process can be expensive, complicated and designed to favor larger organizations.

To address many of these concerns, Congress passed the Small Business Reorganization Act (SBRA) that was signed into law in August 2019 with an effective date of February 19, 2020.  The SBRA creates a new subchapter V of chapter 11 for “small business debtors,” currently defined in the Bankruptcy Code to be a person or entity engaged in commercial or business activities with less than $2,725,625 in debt and more than fifty percent of that debt arising from commercial or business activities.

Key Features of the Bankruptcy Law

  1. Requiring the appointment of an individual to serve as the trustee in a chapter 11 case to perform a variety of duties ranging from facilitating the development of a consensual reorganization plan to appearing in court at status conferences and hearings on major issues.
  2. A streamlined process whereby the small business must file a plan within ninety days of filing that eliminates the need to separately prepare a disclosure statement. In addition, small business debtors are excused from the statutory obligation to pay quarterly fees to the U.S. Trustee System Fund.
  3. The plan may provide for the modification of rights of holders of a claim secured by a lien on the owner’s principal residence if the new value secured by the security interest was not used primarily to acquire the property, but was instead used primarily for the business. This provision is designed to make it more difficult for creditors to take away a business owner’s home or place of residence that was used solely to secure business debt.
  4. If the plan is not consensual in that at least one class of claims votes against the plan, the rules for cramdown (approval of a plan over an objection) are significantly weakened under SBRA. The absolute priority rule is abrogated and the court can confirm a plan over the objection of the debtor’s creditors, provided that the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under and has not accepted the plan.  Under this provision, debts will no longer be required to be paid in full for business owners to retain ownership of the company.  Instead, the owner will have to abide by a new formula that pays back the company’s projected disposable income over a period of three to five years.

Contact a Qualified Attorney at YVSM Today

These new changes to the law are designed to help small business owners retain the company that they most likely founded or are actively managing.  If you own or operate a small business and need financial guidance on how the SBRA might benefit your company, the attorneys at YVSM are happy to consult with you on these and other financial matters.

Our attorneys are taking the lead with the implementation of these new changes to the bankruptcy code. Lisa Stevens presented on the new law for the Maryland Bankruptcy Bar Association in October 2019 and has been asked by the U.S. Bankruptcy Court for the District of Maryland to train other professionals on the new law on January 24, 2020.  In addition, Lisa Stevens and Cate Hopkin are both serving on the SBRA Committee that is tasked with proposing potential amendments to local rules and forms to assist with the application of SBRA.  The Maryland Bankruptcy Bar selected Cate Hopkin to chair the committee; and the committee is currently working with other bankruptcy colleagues, certain of the bankruptcy judges, members of the Office of the United States Trustee, and the clerk of the Bankruptcy Court to ensure a smooth and orderly transition once the SBRA takes effect.