In a recent article the New York Times, citing a poll, rather pessimistically stated that more than 40% of the small businesses in the country could close permanently in the next six months 
because of the coronavirus pandemic. Hopefully this not come to pass as the economy is opened up and we are able to control further outbreaks of Covid-19. For small businesses that are able to struggle through and survive the pandemic, some relief may be available through the Small Business Reorganization Act of 2019 (also known as “Subchapter 5”) that became effective for cases filed in February 2020. The cost of Chapter 11 has always been an impediment for small businesses seeking to reorganize. Many of the same requirements for large commercial cases also applied to small businesses and Bankruptcy lawyers typically have to get an upfront retainer to protect them for the first few months of the case. This alone leads many businesses to continue struggling or close entirely. The new procedures will probably save many small businesses needing to reorganize.
The first question is what “small businesses” qualify for the new procedures. The primary qualification is the level of current debt. Initially, the debt limit for Subchapter 5 was total debt (secured and unsecured) of $2,725,625.00 but it was raised to $7.5 million under the Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). Although the initial limit was a significant amount, consider a small business in metro Atlanta that may have an SBA Loan, a multi-year lease, equipment and inventory loans and other trade debt. It would be relatively easy for even a “small” local business to exceed the initial limit.
There are several potential benefits for small businesses in the new Chapter 11, Subchapter 5, including:
- A case trustee is appointed to monitor the case and, hopefully, assist the business and creditors in reaching a workable plan of reorganization and keeping the case on track. Unlike in larger Chapter 11 proceedings the trustee does not take over the operations of the company. In addition, there is no creditors committee. Although a committee may provide beneficial oversight in larger cases it is often an unnecessary burden in smaller cases and it can be very expensive.
- A plan of reorganization must be filed within 90 days and the term must be between three and five years. Recent cases indicate that the 90 day deadline can be extended for cause. For example, an extension may be warranted as the pandemic continues and it is difficult for the business to forecast income and expenses in the short term. The business does not have to file a separate disclosure statement. The new rules also make it easier to get the plan confirmed even with objecting creditors.
- There are no United States Trustee fees.
- The owners of the business can retain their ownership and, therefore, do not need to meet the “absolute priority rule.”
- If the business makes all plan payments it receives a discharge of remaining debt.
With the favorable changes discussed above many small business should be able to survive through the pandemic and reorganize their debts.
Scott Riddle’s practice focuses on bankruptcy and reorganization. Scott has represented businesses and other parties in Chapter 11 cases for almost 30 years. You can contact Scott at 404-815-0164 or scott@scottriddlelaw.com. For more information, click here.