Small Business Reorganization Act Goes Into Effect

Pessin Katz Law, P.A.

Pessin Katz Law, P.A.

This month the Small Business Reorganization Act (SBRA) goes into effect, impacting approximately 40% of small business who reorganize in bankruptcy and their creditors. We have a quick overview of the Act and its terms.

Who is impacted? Businesses or individuals with under $2,725,625 in debts, provided at least half of such debt is business debt, and their creditors.

What is the purpose of the SBRA? The SBRA makes reorganization under the Bankruptcy Code quicker and easier for small businesses. It is hoped that the SBRA will help more small businesses survive economic downturns and other challenges, which will help small businesses and those who deal with them. However, the quick turnaround and new provisions will present challenges for creditors of small businesses who are not ready to act quickly.

What are some of the key provisions? The SBRA makes reorganization quicker and less expensive for small businesses by eliminating U.S. Trustee’s fees, disclosure statements and the creditors’ committee. Disclosure statements, which explain how the plan is expected to work and how it will impact creditors, can be expensive to create and are subject to an often lengthy approval process. Creditors’ committees are funded by the assets and income of the debtor and can be a significant additional expense. In addition to eliminating those expenses, the SBRA promotes a quick exit by requiring an outline of how the debtor plans to reorganize no later than 46 days after filing. A debtor is then required to propose a formal plan 90 days after filing. Reorganization can occur in a few short months. Even better for the owners of small businesses, business loans secured by a principal residence may be eligible for restructuring as well.

While these benefits are great for small businesses, they may create additional challenges for creditors. Because the plan may be confirmed quickly and there is no disclosure statement or creditors’ committee, each creditor will have to carefully review the plan to understand what to expect. Additionally, the quick timeframe means that it’s important to act as soon as a creditor knows that a business debtor has filed bankruptcy. Another key difference is that the debtor can pay those who provided goods and services just before or during the bankruptcy over the life of the plan. That means that it could take five years for someone who provided goods and services to the debtor after the bankruptcy was filed to be paid in full. Creditors will have to be careful if they plan to continue to do business with a small business who has filed for bankruptcy under the SBRA.

When does this take effect? The SBRA takes effect February 19th.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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