• Ronald A. Flate

New bankruptcy rules give relief to small businesses

Dear Clients and Friends,

Chapter 11 bankruptcy is not an easy process, and rules have traditionally favored large businesses. Now, distressed small businesses will have a better chance at reorganization under a new subchapter of the federal bankruptcy code.

The Small Business Reorganization Act of 2019 – a new subchapter of Chapter 11 of the Bankruptcy Code – which will go into effect on Feb. 19, 2020, makes Chapter 11 reorganization a more affordable and feasible process for small businesses. At this time, the act only applies to business debtors with secured and unsecured debts, subject to certain qualifications, less than $2,725,625 (at least 50 percent business debt) who can now reorganize under a new subchapter that makes the process faster and more affordable.

Notably, the act establishes that an independent trustee will be appointed to oversee the bankruptcy process. That coincides with the elimination of creditor committees and court-approved disclosure statements.

Additionally, the act removes creditor voting and approval requirements. Under a traditional Chapter 11 bankruptcy, a class of creditors must approve the plan in order for it to be confirmed. Now, in qualified small business cases, the court can determine a proposal is fair and equitable over creditor objections.

Finally, the absolute priority rule no longer applies. That rule prohibited business owners from retaining equity, unless all creditors were paid in full. Now, small business owners can maintain an ownership interest, even if creditors are not fully compensated.

Better outcomes overall – previous requirements scared off many would-be filers. Of those that did make an attempt, less than 27 percent of filings resulted in confirmed plans of reorganization, as reported by law.com. The changes are designed to reduce costs and improve a debtor’s ability to survive the bankruptcy process.

Creditors will no longer be able to block small business reorganization plans. With an independent trustee in place, and court control over plan approval, rulemakers hope the process will lead to better overall returns for claimants.

We continue to invite you to call us for a free phone evaluation of your business’s legal needs. 

Best,

Ron

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