Congress recently enacted the Small Business Reorganization Act of 2019 (the “SBRA”), which created Subchapter V of the Bankruptcy Code, and became effective on February 19, 2020. The SBRA was enacted to expedite and reduce the cost of bankruptcy for small business debtors with debt of approximately $2.7 million. The enactment of the SBRA was timely, as it may provide relief for individuals and small businesses impacted by the COVID-19 pandemic.
A month after the SBRA went into effect, and in response to the economic fallout from the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (the “CARES”) Act. The CARES Act expanded this relief to a wider demographic by increasing the debt-eligibility threshold from the approximately $2.7 to $7.5 million. This expanded eligibility expires after one year, temporarily benefiting not only additional small businesses but also larger companies, private equity funds, and individuals looking for a way to reorganize their debts in an effort to save their businesses.
The SBRA did not change existing Chapter 11 provisions regarding small business debtors and thus in order to take advantage of the new Subchapter V, the debtor must make the election at the time of filing, which is now set forth in Line 13 of the Individual Petition (Form 101) and Line 8 of the Petition for Non-Individuals (Form 201). The official bankruptcy forms were also amended to reflect CARES Act changes, including to the Voluntary Bankruptcy Petition forms.
Seven of the biggest changes are:
These are just some of the notable provisions that could allow small businesses and individuals to go through the bankruptcy process in a more streamlined and effective way, and it may become an attractive alternative should the economic fallout from this crisis deepen. However, certain restrictions apply if small businesses have applied or intend to apply for the Paycheck Protection Program (PPP), which is part of the CARES Act. The Small Business Administration, in charge of administering the PPP, released an interim rule restricting eligibility for PPP loans if the companies file bankruptcy. This issue has been considered by bankruptcy courts around the country. Hidalgo Cty. Emergency Serv. Found. v. Carranza (In re Hidalgo Cty. Emergency Serv. Found.), 2020 Bankr. LEXIS 1174 (Bankr. S.D. Tex. Apr. 25, 2020); Cosi Inc. v. Small Business Administration et al., Case No. 1:20-ap-50591 (Bankr. D. Del. Apr. 28, 2020).