Can I File a Subchapter V SBRA Case if My Business is Closed Down? The Answer is Yes!
The caselaw on the new 2020 Small Business Reorganization Act (“SBRA”), which is found in the new “Subchapter V” of the Chapter 11 Bankruptcy statutes, continues to roll in. ABI reports that there have been approximately 600 filings since the SBRA became effective in February 2020.
All debtors who file for any type of bankruptcy must prove that they are eligible for filing. They also must prove they are eligible for the specific chapter they have chosen. One question has been addressed in several cases, all holding the same way so far. The definition of “small business debtor” does not have any limitations about currently being in business.
Chapter 11 Case Study – Blanchard
The Blanchard case is the latest case to address this issue, coming out of the Bankruptcy Court in Louisiana. The Court stated that the new subchapter V “offers small business debtors, including individuals, a streamlined process and tailored tools for confirming a plan,” quoting In re Trepetin, 2020 WL 3833015 (Bank. D. Md. 2020). Both the UST and a creditor objected to the Blanchards’ seeking to amend an existing chapter 11 case into a subchapter V case.
The creditor made several arguments: (i) that the Debtors were not “engaged in commercial or business activity” and thus did not qualify; (ii) that an individual debtor must also have a separate legal entity that is also a debtor, and (iii) that an individual debtor with debt resulting from the individual’s guaranty of a business debt did not qualify. All these arguments were rejected. This is a key ruling in favor of subchapter V debtors.
Chapter 11 Bankruptcy Eligibility Ruling
The Blanchard court followed the cases of In re Wright, 2020 WL 2193240 (Bankr. D. S.C. 2020) and In re Bonert, 2020 WL 3635869 (Bankr. C.D. Cal. 2020). Now, at least three courts have ruled that there is no limitation that debtors must be “currently” engaged in business activities. Rather, if a majority of the debts stem from the operation of either currently operating businesses and/or currently non-operating businesses, and the debts are within the SBRA’s debt limit, then the debtors do qualify to be small business debtors under the SBRA.
We often see the personal remnants of business guaranties in failed businesses. These cases are beginning to make clear that those individuals struggling with individual guaranties left from closed businesses need to look at SBRA as one possible option. If for some reason chapter 7 bankruptcy is not a viable option, and the chapter 13 debt limits may be exceeded, SBRA should be considered. Welcome relief in 2020.
Update 3/29/2021: This provision has been extended to June 2022.
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