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What is the Small Business Reorganization Act?

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On August 23, 2019, a relatively small twenty-two-page bill, known as the Small Business Reorganization Act of 2018 (“SBRA”), was signed into law by the President of the United States.

The law would become effective six months later, February 19, 2020, only weeks before a worldwide pandemic was announced, that would bring the US economy to a halt.

What is the Small Business Reorganization Act

In technical terms, it is a new bankruptcy chapter filing, Chapter 5, and, at the same time, is a subchapter of the current US Chapter 11 code created in 1978. In practical terms, it is being called “A Better Road to Reorganization for Main Street Businesses” (American Bankruptcy Institute).

Chapter 11 is very costly, very contentious (between creditors and debtors), very time consuming and has many regulations that slow down the process of an eventual exit from bankruptcy. Chapter 5 aims to streamline the Chapter 11.

What is the Intent of the SBRA?

Many small businesses that were facing financial challenges and wanted to stay in business and restructure did not have good options in terms of bankruptcy options. They were too small and could not afford the time-consuming and difficult Chapter 11 reorganization process. As a result, these small businesses attempt to restructure in private, without the protection of the bankruptcy courts. Many did not make it through the process and ended up closing their doors.

What Is Different About SBRA v. Chapter 11?

The changes are designed to speed up the process, simplify the process, give the subject company more control, and make it less costly, so that it has a better chance of exiting bankruptcy in a stronger position.

  • Number of days to file a plan: 90 days compared to 300 for Chapter 11.
  • Creditors’ Committee and Control: no creditors’ committee required. Under Chapter 11, creditor committees added time and expense, and one unsatisfied creditor could hold up the whole process. Under the new Chapter 5, the debtor company is in control, giving them a better chance to exit bankruptcy and not have to liquidate.
  • Trustee: Chapter 5 retains the trustee; however, debtor companies can spread the trustee commissions over the life of the reorganization.
  • Absolute priority rule: this is a rule under the existing Chapter 11 that ranks the preference of creditors to receive their money. This rule has been eliminated under Chapter 5, enabling the debtor company to have more flexibility in giving all creditors a chance to recoup a portion of their monies.
  • What Does It Mean to Your Business?

With many small businesses facing an uncertain future from the economic fallout of the pandemic, this new Subchapter 5 may be a lifeline. Bankruptcy laws are complex, and you should always consult with your trusted advisor and attorneys. Sobel’s experienced professionals can help you or someone you know with a solvency analysis if a bankruptcy option is being considered.

Tom Gudowicz, Sobel EAC Valuations