The Small Business Reorganization Act (SBRA) went into effect on February 19, 2020. The SBRA is commonly referred to as Subchapter V, referring to the new Subchapter V of Chapter 11 of the Bankruptcy Code, which may provide a much needed lifeline to the many small businesses struggling to survive the economic fallout resulting from the global pandemic and its impacts on small businesses.
Given the likely surge in Subchapter V filings in 2021 and beyond, it is important for both lenders and creditors to know how the SBRA and Subchapter V changes the way Chapter 11 reorganization cases are administered.
- Changes to Financial Requirements Necessary to Qualify for Subchapter V Petition
One of the main goals of the SBRA was to reduce the cost of bankruptcy and expedite the process for businesses with debts less than $2.7 million. The CARES Act passed by Congress earlier this year expanded that to cover debts up to $7.5 million for one year. This change in financial requirements means that many more businesses will qualify for Chapter 11 bankruptcy protection.
- Hybrid Nature of Subchapter V Petition
Subchapter V now incorporates some aspects of Chapter 13 bankruptcy protection where a debtor can propose and confirm a plan of reorganization through a much more streamlined process. A debtor can stretch its proposed payments over 3-5 years during which time the debtor devotes their “disposable income” to paying its creditors.
- SBRA Did Not Change Chapter 11
A debtor must elect for Subchapter V at the time of filing for bankruptcy, because the Act does not change the existing provisions of Chapter 11. This will be important for any business considering the expanded financial requirements of Subchapter V bankruptcy protection this year.
- Debtor has Exclusive Right to File Subchapter V Plan
One of the main changes enacted with the SBRA is that a debtor has the exclusive right to file a repayment plan within 90 days of filing for bankruptcy under this chapter, unless the court extends that deadline for circumstances determined by the judge to be outside of the debtor’s control.
- Subchapter V does not have the Absolute Priority Rule
Subchapter V plans can allow for cramdown of multiple creditors’ claims if they are fair and equitable amongst all creditors. Chapter 11 requires full repayment or the approval of all creditors for reduced payment obligations. This should be an appealing option for businesses with many different current creditors that need a fair and reasonable way to restructure those obligations in order to make the business viable.
- Debtors can Appoint a Subchapter V Trustee While Plan is Confirmed
For those businesses exploring Subchapter V bankruptcy protection, they can appoint a trustee to work on a plan approved by all creditors, object to claims and facilitate minimum protection payments while the full plan is worked out. This will be especially important to those companies that might still need to do business with some or all of their creditors after the plan is approved.
- Sub V Modifications to Mortgages and Non-Purchase Money Security Interests
A plan filed under this new chapter can modify the rights of a non-purchase money security interest or mortgage in real property if that property is used primarily in the operation of the small business. We assist clients in determining whether this applies to their petition.
Get an Experienced Arizona Bankruptcy Attorney
The attorneys at RSN Law have decades of experience with bankruptcy law and they can help a small business in Arizona that would like to explore the best options to restructure their debt obligations with a plan to continue operations. The SBRA and some of these changes under Subchapter V will be a valuable resource for many small businesses struggling to make ends meet during the pandemic. Contact us today at 480-712-0035 or make an appointment online here.
RSN Law intends this article to be for informational purposes, not to be relief on a specific legal matter, and do not create an attorney-client relationship.