New Rules For Small Businesses Who File Bankruptcy Under Chapter 11

When Goldilocks enters the home of the three bears, she searches for creature comforts that are “just right” for her. Her story involves a lot of trial and error — not to mention breaking and entering, and risking the wrath of a family of bears — but children who hear the tale are delighted when she finds something “just right.” There’s something inherently satisfying about finding the right fit after a quest that children are quick to latch on to, and the morally ambiguous tale gives them permission to compare, contrast, and find things in this world that are “just right” for them. 

Until recently, small businesses going through the bankruptcy process were like a bunch of frustrated Goldilocks who never found anything “just right.” Filing under Chapter 7 meant liquidating assets and shutting down while filing under Chapter 11 often proved too cumbersome or expensive to manage. 

A new federal law, The Small Business Restructuring Act of 2019 (SBRA), which is also being referred to as Subchapter V, has created a new bankruptcy process designed to be “just right” for small businesses. 

Understand SBRA

The SBRA fast-tracks the bankruptcy process and allows for far greater flexibility in negotiating restructuring plans with creditors. It also specifies that a trustee will work with the small business debtor and its creditors to facilitate the development of a consensual plan of reorganization. 

It is the role of the trustee that makes the SBRA process really different from other chapters of the bankruptcy code a business can file under. The trustee is supposed to take a very hands-on role, much like that of a trustee in a Chapter 12 or 13 case filed by an individual. 

According to the Department of Justice, it has hired around 250 of these trustees so far. “These trustees offer a diverse set of business, accounting, turn-around management, and legal skills.  In addition, the USTP developed a comprehensive manual and handbook to guide staff and subchapter V trustees in carrying out their new SBRA responsibilities; provided extensive training to staff, subchapter V trustees, bankruptcy professionals, and others interested in the new law; and coordinated with the bankruptcy courts on administrative issues to ensure a successful implementation.”

Small Business Debtor

Only a “small business debtor” may elect to proceed under the SBRA. A small business debtor may be an individual, partnership, or corporation that: 

  • Is engaged in commercial or business activities;
  • Has no more than $2,725,625 of total debt; at least 50% of which must be from the business or commercial activities; and
  • The debtor’s principal activity cannot be a single-asset real estate operation.

A debtor that meets these criteria may voluntarily elect to file under Subchapter V of Chapter 11. 

At Hanson & Payne, we are eager to help small business clients who feel this new process may be “just right” for them. If you would like to schedule an initial consultation to talk about the benefits of the new SBRA bankruptcy process or discuss other options available to your business, please contact us.