Whether your business owes money or is owed money, a basic understanding of the new law could keep you out of trouble.

In all the tumult of the last few months, you might have missed a new bankruptcy tool that is a game changer.

The Small Business Reorganization Act (SBRA), which became law in February 2020, streamlines and simplifies many of the rules applicable to small Chapter 11 reorganizations.

If you have ever had the unpleasant experience of participating in a Chapter 11 bankruptcy, as a creditor, debtor, defendant, etc., then you know Chapter 11 is time consuming, expensive and draining. For better or for worse, SBRA changes that.

For qualifying small businesses, SBRA cuts back on much of the Chapter 11 overhead and substantially simplifies the process. Initially, the new SBRA provisions (contained in Subchapter V – that’s Roman numeral “5” – of Chapter 11 of the Bankruptcy Code) were available to debtors with less than the remarkably unround debt of $2,725,625. With passage of the CARES Act in March, that debt limit was increased to $7.5 million, but only until March 2021.

FOR DEBTORS

If you owe money, SBRA makes reorganization quite a bit faster, cheaper and probably easier. The new law is intended to:

• allow you to retain control over your business operations while reorganizing;
• accelerate deadlines;
• allow greater flexibility in negotiating restructuring plans with creditors; and
• reduce reorganization costs.

You sacrifice some flexibility to obtain those benefits, but on balance the SBRA is seen as a boon for small, financially struggling businesses – especially those that have business debt higher than the $2.7 million threshold specified in the new law and lower than the temporary $7.5 million threshold provided by the CARES Act.

If your business debt falls into that range, don’t delay seeking professional advice until shortly before the temporary limit expires next March. You will not be happy if your business could have fit in a Subchapter V reorganization but, due to your procrastination, is forced to use Chapter 11.

FOR CREDITORS

If you are owed money and are worried about the financial stability of your borrower, you need to know the borrower now has an additional tool. Subchapter V makes it easier for a debtor to “cram down” a plan over your objection. In fact, a bankruptcy court can confirm a Subchapter V plan over every creditor’s objection

This possibility injects a new dynamic into discussions with distressed debtors. Debtors may be optimistic, perhaps unrealistically, that they can force a better deal in Subchapter V than was offered by their creditors. As a consequence, many banks and other professional creditors are adjusting their workout expectations to match this new reality; meanwhile, a casual creditor unaware of Subchapter V might overplay its hand.

LOOKING AHEAD

The balance of leverage between creditors and certain debtors has shifted. How much it has shifted remains to be seen. Locally, Alamo Draft House filed under Subchapter V last month, and many are paying close to attention to how that case progresses.

Although SBRA was passed last fall, its February effective date occurred just on the cusp of (a) the coronavirus-driven lockdown and (b) the stock market’s retreat from historic highs. Many retail sectors were already struggling, and the impact of these events may be the final straw that, in turn, could distress the commercial real estate and other markets.

The American Bankruptcy Institute reports that bankruptcy reorganization filings in May were up by 48% over the year before. It is likely that a good portion of them were Subchapter V cases, in light of the new law’s forgiving provisions.

As with all pre-bankruptcy counseling, for creditor or debtor, get legal advice early. Waiting until the matter has become dire never works well, and your ability to make the best of your situation may hinge on how quickly you act.

If you have a question about the Small Business Reorganization Act or a debtor or creditor bankruptcy issue, contact Phil Rupprecht at 602-277-2010 or by email.