The new legislation could make filing Chapter 11 Bankruptcy appealing to small businesses
By: Jamie L. Harris
Filing for chapter 11 bankruptcy relief should be easier for small businesses by February 2020 when the Small Business Reorganization Act of 2019 becomes effective. The legislation which President Trump signed back in August will bring some debtor-friendly changes to small business bankruptcy. Small business debtors have total aggregate liabilities not exceeding $2,725,625. Also, the standard chapter 11 bankruptcy process has been viewed as too vigorous and costly for many small businesses. The Act was designed to make the chapter 11 bankruptcy more streamlined and cost-effective for small business debtors.
One of the major changes will be the appointment of a trustee. The trustee will receive and disburse the chapter 11 plan payments. This change is similar to chapter 12 and chapter 13 trustees who administer plan payments. The chapter 11 trustee will not operate the business. Under the Act, only the debtor can file a plan. However, the debtor only has 90 days to file a plan. The appointment of a trustee and the 90-day deadline to file a plan are a part of the sweeping changes. These changes should assist in cost concerns for small business debtors. Also, the Act alleviates appointment of a creditors committee for unsecured creditors.
The Act should also aid in plan confirmation. Impaired classes of claims no longer need to accept the plan provided it is “fair and equitable” and does not discriminate unfairly. The “fair and equitable” prong will be met if the debtor commits all of its disposable income received during the plan for a period of 3 to 5 years. The Act also offers the debtor-friendly provision that loans secured by principal residences may be modified if the loan proceeds were used for the small business. With these major changes, chapter 11 bankruptcy may become a more attractive and affordable vehicle for small businesses to get reorganization relief.
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