Adverse Witness: Good News for Small Businesses in Financial Distress

On August 23, 2019, President Trump signed into law one of the most important pieces of legislation to affect our bankruptcy system in several years: the Small Business Reorganization Act (“SBRA”).  The SBRA—which goes into effect on February 19, 2020—eliminates many procedural hurdles small businesses otherwise need to clear in typical Chapter 11 cases.

Chapter 11 reorganization is currently cost prohibitive for many small businesses.  The American Bankruptcy Institute found that, of the more than 18,000 small businesses that filed a Chapter 11 case between 2008 and 2015, less than 27 percent were able to propose a “plan of reorganization” approved by a bankruptcy court.  The SBRA is poised to simplify the Chapter 11 process for most small business debtors, increasing accessibility to small business owners throughout Southwest Florida.

SBRA creates a new “Subchapter V” that small business debtors in Southwest Florida can use to their advantage.  Unlike a typical Chapter 11 case, an independent trustee gets appointed in every Subchapter V case.  Once appointed, the trustee will facilitate and develop a consensual plan of reorganization among the company’s creditors.  Subchapter V also excuses the small business debtor from paying fees to the Office of the United States Trustee on a quarterly basis, which can get quite expensive in bankruptcy cases.  By eliminating these fees, the financial burden placed on small businesses in bankruptcy is greatly alleviated.

Additionally, certain burdensome documents do not need to be filed with the Court under Subchapter V, like disclosure statements.  A disclosure statement is tantamount to preparing an investment prospectus.  Eliminating the disclosure statement requirement drastically reduces the cost of Chapter 11 reorganization for small businesses.

Finally, Subchapter V saves small business debtors money by requiring that a plan of reorganization be filed with the bankruptcy court within 90 days of the case’s commencement.  By requiring a plan within 90 days, Subchapter V prevents cases from lingering in bankruptcy.  In short, Subchapter V greatly reduces the risk of unnecessary fees and costs.

There are a few caveats: small businesses with more than $2,725,625.00 in debt are generally ineligible for relief under Subchapter V, as are single-asset real estate entities (yes, those italics are important).  However, Subchapter V will still help most small businesses eligible to reorganize under the Bankruptcy Code do so in a cost-efficient manner.  Today, small businesses that cannot afford a bankruptcy reorganization are generally forced to shut down or liquidate under Chapter 7 of the Bankruptcy Code.  On February 19, 2020 many of those small businesses will finally get a fighting chance to stay alive—right here in Southwest Florida.

Co-Authored:

Mike Dal Lago, Founder and Managing Partner of Dal Lago Law, a leading Business Law and Business Bankruptcy law firm in Naples, Fla. with 20 years of experience in insolvency matters.

Christian Haman, Associate Attorney at Dal Lago Law, assists companies at all stages of their corporate development.  Mr. Haman most frequently represents debtors and creditors navigating the complexities of Chapter 11 bankruptcy