On February 19, 2020 the Small Business Reorganization Act (SBRA) became effective. This law provides a vehicle for small businesses to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Traditional Chapter 11 Cases are typically very expensive and complicated, and can also be lengthy. The SBRA provides a simpler, streamlined, cost effective path to restructure small business debt in a Chapter 11 Bankruptcy.
The SBRA imposes an aggregate debt limit of $2,725,625, of which at least 50% must have arisen from commercial or business activity. The Cares Act (enacted by Congress on March 27, 2020) expands the SBRA to debtors with 7.5 million of combined secured and unsecured debt. This expansion, however, is only effective until March 27, 2021. Individuals that are in business (in addition to corporations and limited liability companies) may file under the SBRA. In fact, it provides a valuable option to individual debtors, who may not file Chapter 13 if their secured and unsecured debt exceeds $1,677,125.
The SBRA has some attractive features for small business debtors. Unlike non-SBRA debtors, only the debtor may file a Chapter 11 Plan (thereby avoiding a confirmation fight between competing plans). Significantly, SBRA eliminates the absolute priority rule. This means that the persons that own the bankrupt business can retain their ownership even if the unsecured creditors do not receive full payment of their claims. However, in that event, the Chapter 11 Plan must provide that all of the debtor’s projected disposable income will be applied to make payments under the plan.
The Law Offices Of Todd S. Frankenthal has offices in Fort Lauderdale, Boca Raton, and West Palm Beach. It assists individuals and businesses in financial distress throughout South Florida.