The Small Business Reorganization Act (“SBRA”) goes into effect on February 29, 2020.  It has a number of features intended to increase the opportunities for small, individually owned, and closely held businesses to reorganize their operations pursuant to an approved plan of reorganization.

Eligible small business owners will be able to choose to be a debtor under a new subchapter to Chapter 11 of the Bankruptcy Code.

The eligibility requirements to be a subchapter 5 debtor are:

1.         The entity or individual must be engaged in commercial or business activities;

2.         The primary commercial or business activity must be not be the ownership of single asset real estate;

3.         Aggregate non-contingent secured and unsecured liability must not exceed $2,725,625; and

4.         At least 50% of the debts must have arisen from the debtor’s commercial or business activities.

Being a debtor in subchapter 5 has a number of advantages for the debtor seeking to reorganize over the relief that is currently available under Chapter 11.  Some of those advantages are summarized below.

1.         The absolute priority rule does not apply to a subchapter 5 debtor.  The absolute priority rule[1] has been a significant disincentive to small business owners seeking reorganization under Chapter 11, because these owners will, generally, lose ownership of their business unless they can pay creditors in full under an approved plan, or provide new, non-estate value for an equity interest in the reorganized debtor. 

2.         Currently, in a contested plan confirmation, a debtor must meet a five-year net disposable income test under 11 U.S.C. § 1129(a)(15)(B).  Under the SBRA, the bankruptcy court can confirm a subchapter 5 debtor’s plan over creditor objection where the plan provides for the payment of the debtor’s net income over 3 to 5 years. 

3.         An unsecured creditors’ committee will not be appointed by the Office of the U.S. Trustee unless the court orders it.  Instead, every case under the SBRA will have a trustee appointed, although the trustee’s role will be primarily facilitative and advisory.

4          A disclosure statement will no longer be required.

Small business owners, and their advisors, should familiarize themselves with the SBRA in advance of effective date, and take it into consideration when contemplating a restructuring.