CARES Act Makes Small Business Bankruptcy More Accessible

Nelson Mullins Riley & Scarborough LLP

Companies with Debt Up to $7,500,000 Now Eligible for Relief

The primary purpose of the new CARES Act is to provide emergency financial and health care assistance to individuals, families, and businesses that are adversely affected by the coronavirus pandemic. One of the less noticed but critically important changes made by the CARES Act is the amendment to the small business provisions of Chapter 11 of the Bankruptcy Code known as the Small Business Reorganization Act.

Summary of the Small Business Reorganization Act (SBRA)

The purpose of the SBRA is to permit small businesses to reorganize under Chapter 11 of the Bankruptcy Code in a simpler, cost-effective, and expeditious way. Among the cost-saving provisions of the SBRA are: (1) that a committee of unsecured creditors is not appointed unless otherwise ordered by the court; (2) a mandatory status conference be held shortly after filing to facilitate an expeditious reorganization; (3) a requirement that the debtor file a plan of reorganization within 90 days after the bankruptcy filing; and (4) the elimination of a separate disclosure statement in addition to a plan unless the court orders otherwise. These modifications, and others, seek to make the Chapter 11 reorganization process more accessible and affordable for small businesses without the economic resources to absorb the more cumbersome aspects of a larger Chapter 11 case.

The SBRA became effective on February 19, 2020. This timing is somewhat fortuitous by delivering help just when small businesses are under extraordinary strain caused by the COVID-19 pandemic and associated economic damage. Congress further revised the SBRA in the CARES Act to broaden the SBRA’s impact.

The CARES Act Amendments to the SBRA

A business may file a bankruptcy case under the SBRA if it meets certain requirements in the Bankruptcy Code. Principal among those requirements are that the business owe aggregate, non-contingent, liquidated secured and unsecured debts of not more than $7,500,000, which is an increase from the law’s prior limit of $2,725,625.

This new debt limit is applicable to small business cases filed on or after March 27, 2020. Barring further action by Congress, the increase will sunset after a period of one year, and the debt limit will return to roughly $2.7 million in late March of 2021.

Implications of the Increase

Chapter 11 of the Bankruptcy Code, and by inclusion, the SBRA, is meant to provide debt adjustment and reorganization to facilitate the long-term financial health of small businesses. For companies that take advantage of the law, the SBRA will become a very important tool to mitigate the economic fall-out of the COVID-19 pandemic. Clearly, while short-term liquidity needs are top of mind for small businesses — how to make payroll, how to keep supply chains engaged, in some instances how to literally keep the lights on — the economic consequences of the global reduction in commerce will require that some companies consider aggressive solutions for reorganization in the months after life and business normalize. Thanks to Congress and the CARES Act, the speed and efficiency afforded to small businesses under the SBRA will be an ever larger arrow in the quiver to restart the economy on the other side of the pandemic. 

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Nelson Mullins Riley & Scarborough LLP
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