What Is the SBRA—and Could It Save Your Small Business?

The Buchalter Law Group

Congress created the Bankruptcy Code to rescue the honest debtor from unmanageable financial adversity. Through bankruptcy, both individuals and businesses obtain a fresh start by restructuring, reducing, or discharging their debt.

But filing bankruptcy can be a challenge. Not everyone experiences the success they had hoped to derive from bankruptcy, and recent legislation has made this form of debt relief more convoluted and restrictive than before.

Small businesses, for example, have struggled to discharge debt through bankruptcy without losing ownership of their companies. They have been forced to choose between Chapter 11, which is better suited to large corporations, and Chapter 7, which may liquidate assets to pay creditors.

With the passage of the Small Business Reorganization Act of 2019, however, this may no longer be the case.

What Is the Small Business Reorganization Act?

Signed on August 23, 2019, the Small Business Reorganization Act took effect in February of 2020. It added Subchapter V to Chapter 11 bankruptcy, and this subchapter is exclusively available to small business owners. Like Chapter 13, this version of bankruptcy reorganizes debt into a 3-5-year repayment plan.

Compared to the traditional version of Chapter 11, Subchapter V is more cost-effective and streamlined, allowing small businesses to:

  • Restructure finances
  • Modify payment terms
  • Balance income and expenses
  • Regain profitability
  • Reduce obligations
  • Maintain ownership of their business

Previously, Chapter 11 was too expensive for small business owners, and it contained too many legal hurdles. Creditors also had significant leverage and often would not approve reasonable payment plans.

Under Subchapter V, however, small businesses experience the following advantages:

  • No creditors’ committee
  • No disclosure statements
  • No need to obtain approval from creditors
  • A trustee who does not derive benefits from liquidating assets (as is the case in traditional Chapter 11)
  • Potential opportunity to modify the mortgage of a primary residence

To file under Subchapter V, a company must qualify as a small business. Specifically, it must have no more than $2,725,625 of debt.

A Note About the CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily changed elements of the Bankruptcy Code. One of these adjustments is the new debt threshold for Subchapter V of Chapter 11. Until March 27, 2021, debtors can qualify as small businesses if they have no more than $7,500,000 of debt, rather than $2,725,625. Therefore, more businesses will be able to take advantage of Subchapter V until the provision sunsets next year.

Contact Our Firm for Personalized Support

Are you unsure whether Subchapter V of Chapter 11 bankruptcy is right for you? Let The Buchalter Law Group assess your situation to determine your best course of action. Many people believe bankruptcy is not worth the cost, but we have helped countless individuals and businesses gain financial freedom and security through this debt relief strategy. If you are a small business owner, we want to help you reduce your debt without losing your company.

Ready to get started? We are offering free consultations via phone, email, and video chat due to COVID-19. Call (321) 320-6088 or fill out our online contact form to request your virtual meeting today.

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