Small Business Reorganization Act Expands Bankruptcy Relief

Business people taking notes in law firm

Bankruptcy can offer enormous relief to businesses struggling to stay afloat. Business bankruptcy filings are generally either a complete liquidation as a Chapter 7 filing, or a reorganization as a Chapter 11 filing. Sole proprietorships may be eligible for a Chapter 13 filing. Previously, there was a grey area of relief options available for those businesses that did not qualify for, or require liquidation. As of February 19, 2020, Chapter 11 now includes the Small Business Reorganization Act (the “Act”). The purpose of the Act is to increase a small business’ ability to successfully restructure its debt.

What does this mean for bankruptcy filers? The Act provides for a particular type of bankruptcy client that could not be adequately helped before. The Act does not change existing Chapter 11 filings, but rather creates an alternative procedure to ease those burdens for small business who voluntarily seek the benefit of reorganization. This is good news for small businesses, because the exhaustive requirements of Chapter 11 bankruptcy can be difficult for small business debtors, as a Chapter 11 may be cost prohibitive to businesses with limited resources.

The Act attempts to remedy the obstacles of Chapter 11 by increasing the ability to negotiate with creditors. A Chapter 11 generally requires a debtor pay all unsecured creditors in full in order to maintain their business. The Act applies to those businesses with no more than $2,725,625 in debt. The Act allows for a more flexible repayment by requiring only what is “fair and equitable” to be paid, which may make it possible to pay a percentage of your debt back and maintain your operation.

For an individual Chapter 7 or Chapter 13 bankruptcy, a Trustee is appointment to oversee the case and all of its elements, which could include the liquidation of assets or ensuring creditors are properly paid through the plan. Traditionally, a Chapter 11 bankruptcy filing would not have the same oversight. Filings that occur under the Act will now have a Trustee appointed to monitor the case and facilitate a successful payment plan.

In a field as complex and regulated as bankruptcy it can be an overwhelming process to determine what Chapter of bankruptcy to file, or if you even qualify to file. Please call us so that we may provide assistance in navigating the best path to relief for you.