Business owners likely agree that navigating financial distress is extremely challenging.
The Small Business Reorganization Act (SBRA) offers a new path for qualifying small businesses to restructure debt and regain solvency.
This guide will explain SBRA's key provisions, eligibility requirements, benefits over Chapter 11 bankruptcy, and strategies for developing a confirmable reorganization plan under the new law.
Introduction to the Small Business Reorganization Act
The Small Business Reorganization Act (SBRA) was enacted in 2019 to provide more accessible paths to reorganization for small business debtors. This introductory section outlines key provisions of the law and who it aims to help.
Overview of the SBRA
The SBRA made several debtor-friendly changes to bankruptcy laws for small businesses:
- Increased the debt threshold to file under Chapter 11 to $2,725,625
- Shortened the timeline for reorganization plan to 90 days
- Allowed debtors to retain ownership and control during restructuring
These changes make it easier for small businesses to reorganize successfully.
Reasons for the SBRA's Enactment
Prior to the SBRA, small businesses faced challenges reorganizing under the standard Chapter 11 process:
- High legal and administrative costs
- Strict deadlines for reorganization plans
- Loss of ownership control
Many small businesses were pushed to liquidate instead of reorganizing to recover. The SBRA provides customized Chapter 11 rules to improve small businesses' chances of restructuring their finances.
Intended Beneficiaries of the SBRA
The SBRA aims to help small business debtors reorganize, such as:
- Sole proprietors
- Partnerships
- Small corporations
By tailoring bankruptcy rules for small entities, the law makes financial recovery more feasible for struggling companies.
What is the purpose of the SBRA?
The Small Business Reorganization Act (SBRA) was introduced in 2019 to provide a more streamlined and cost-effective option for small businesses to reorganize under the bankruptcy code.
The key purposes of the SBRA include:
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Creating a new Subchapter V bankruptcy proceeding specifically for small business debtors with no more than $2,725,625 in total debts. This allows qualifying small businesses to file bankruptcy and reorganize more efficiently.
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Making the reorganization process faster and less expensive compared to a traditional Chapter 11 bankruptcy. Subchapter V cases have relaxed administrative requirements.
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Allowing the small business debtor to retain control and ownership of the company through the restructuring process. Existing managers and equity holders can stay in place.
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Giving the debtor an exclusive right to file a reorganization plan, with flexibility on plan contents. This makes it easier for the small business to negotiate with creditors.
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Providing protections unique to small businesses, such as not having to pay quarterly trustee fees during bankruptcy.
In summary, the SBRA aims to provide small businesses with an expedited and more cost-effective path to reorganizing and emerging from bankruptcy as a viable going concern. This preserves business continuity and jobs.
What is the small business restructuring Act?
The Small Business Reorganization Act (SBRA) is a law that aims to make the Chapter 11 bankruptcy process faster and more affordable for small businesses in financial distress.
Key Provisions
The SBRA includes several key provisions:
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Appointment of a trustee - The court may order the appointment of a trustee to oversee the bankruptcy case if there is evidence of fraud or gross mismanagement by the debtor. This aims to protect creditors.
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Increased debt limits - The law raised the debt limits to qualify for a small business Chapter 11 bankruptcy, allowing more small businesses to file. The limit is now $2.725 million in secured and unsecured debt.
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Streamlined plan process - The law implements a streamlined plan process so small businesses can exit bankruptcy quicker. This includes faster deadlines and reduced administrative burdens.
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Reduced legal fees - By streamlining the process, legal fees may be reduced since less court involvement is needed. This makes Chapter 11 more affordable.
The SBRA provides much-needed relief for small business owners struggling with overwhelming debt. By tailoring the Chapter 11 process to small enterprises, bankruptcy becomes less costly and moves faster.
Does Chapter 11 wipe out all debt?
While Chapter 11 bankruptcy does not typically discharge all debts, it can provide businesses with valuable tools to restructure finances and operations to regain profitability.
The key benefits of Chapter 11 include:
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Automatic Stay: Filing for Chapter 11 automatically stops collections activities and foreclosures. This pause gives businesses breathing room to restructure.
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Debtor in Possession: Existing management usually remains in place during Chapter 11. This allows continuity of operations while developing a reorganization plan.
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Reorganization Plan: The goal is for the business to develop a plan that allows it to pay creditors over time while returning to viability. Creditors must approve the plan.
So Chapter 11 enables financially distressed businesses to reorganize rather than liquidate. Through negotiations with creditors, businesses can potentially reduce debt burdens to manageable levels and craft payment plans aligned with earning potential. While not all debt may be eliminated, the ultimate aim is to attain solvency and continue operations.
How does Chapter 13 work?
Chapter 13 bankruptcy, also known as a wage earner's plan, enables individuals with regular income to develop a repayment plan to pay back all or part of their debts over time.
Here are some key things to know about how Chapter 13 bankruptcy works:
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Eligibility: To qualify for Chapter 13, you must have a regular source of income and debts below set limits. This makes it accessible to wage earners.
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Repayment Plan: You work with a bankruptcy trustee to create a 3-5 year repayment plan. This allows you to catch up on missed payments and pay back a portion of debt owed.
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Automatic Stay: Filing triggers an automatic stay that halts debt collection, wage garnishment, foreclosures, and repossessions while your repayment plan gets approved.
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Discharge: After completing all payments under the plan, you receive a discharge of certain remaining debts. While not all debts qualify, this provides financial relief.
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Retaining Assets: Chapter 13 allows you to catch up on payments and keep assets like your home or car that you may have lost with Chapter 7 bankruptcy.
The key benefit of Chapter 13 bankruptcy is it gives individuals time to retain assets while catching up on payments through an affordable repayment plan supervised by the court. This structure makes it accessible to wage earners needing temporary relief.
Understanding SBRA's Legal Framework
The Small Business Reorganization Act (SBRA) was enacted in 2019 as part of the bankruptcy code to provide more accessible debt relief and reorganization options for small business owners. As an addition to existing bankruptcy law, SBRA aims to streamline the process specifically for small businesses to help them recover from financial distress.
SBRA's Position in the Bankruptcy Law Hierarchy
SBRA modifies Chapter 11 bankruptcy to create a faster, more cost-effective path to reorganization designed for small business debtors. The law didn't replace Chapter 11, but rather adapted key components like the reorganization plan to better serve the needs and resources of small businesses. As an amendment to the bankruptcy code, SBRA provides small businesses access to the well-established Chapter 11 legal framework while reducing burdens that previously made it inaccessible.
Navigating the Judicial Process Under SBRA
The judicial process under SBRA follows bankruptcy court procedures, albeit with certain modifications to reduce time and costs compared to a standard Chapter 11 case. Key steps include:
- Filing a voluntary SBRA petition and required documentation with the bankruptcy court
- Attending the creditors' meeting and meeting with the US Trustee
- Filing monthly operating reports and financial disclosures
- Negotiating the reorganization plan with creditors
- Obtaining bankruptcy court approval of the reorganization plan
At each stage, SBRA introduces changes like limits on creditors committees and the appointment of trustees in order to simplify the process for the small business debtor.
The Role of Bankruptcy Court in SBRA Cases
As with any bankruptcy case, the bankruptcy court oversees the proceedings and must approve the ultimate reorganization plan. However, under SBRA the court takes a more hands-off, expedited role. The court may appoint a trustee only for cause and does not require a separate disclosure statement. It must confirm the plan if it meets SBRA's requirements. Overall the court enables the streamlined, small-business-friendly process created under the new law.
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Eligibility Requirements for SBRA
The SBRA has specific eligibility criteria for debtors to qualify for the specialized bankruptcy process. To use SBRA, a small business must meet debt thresholds and income source requirements.
Debt Thresholds for SBRA
The SBRA caps a small business's total secured and unsecured debts at $2,725,625 to qualify. Exceeding this debt level disqualifies a company from using this streamlined restructuring process. The debt limit aims to restrict SBRA to truly small enterprises needing a faster and less expensive path to financial recovery.
Percentage of Business Income from Real Property
No more than 50 percent of a debtor's gross income can come from leasing real property. If over half of a small business's earnings are from real estate holdings rather than core operations, it does not meet the income standards to file under SBRA rules. This requirement focuses the law's relief on operating companies directly producing goods or services.
Ownership Structure Considerations
The SBRA looks at connections between affiliated debtors that might exceed the law's debt boundaries in aggregate. If an entity filing under SBRA has ownership ties to related companies also seeking bankruptcy protection, their total combined debts must stay within the maximum to qualify all associated debtors. The bankruptcy court examines ownership constructs to prevent abuse of the SBRA cap.
Financial Distress and Corporate Restructuring under SBRA
The Small Business Reorganization Act (SBRA) provides important options for small businesses facing financial distress to restructure their operations and achieve solvency.
Assessing Financial Distress for SBRA Eligibility
To qualify for relief under the SBRA, a small business must meet certain criteria around financial distress. Key factors the court examines include:
- Inability to pay debts as they become due
- Negative cash flow
- Declining revenue over multiple recent fiscal quarters
- Mounting operational losses
- Increasing debt-to-income ratio
Meeting one or more of these thresholds demonstrates the business is experiencing financial hardship that may warrant reorganization under the SBRA framework.
Corporate Restructuring Strategies within SBRA
Within the SBRA process, small businesses have several key strategies to comprehensively restructure their finances and operations:
- Renegotiating terms with creditors and suppliers
- Refinancing or restructuring existing debt obligations
- Selling underperforming assets or business units
- Streamlining operations to reduce costs
- Exploring new financing options like debtor-in-possession lending
Using the protections and tools provided by the SBRA, companies can overhaul their business model to eliminate inefficiencies and restore profitability.
Achieving Business Solvency Post-SBRA
The goal of any restructuring under the SBRA is to regain short and long-term business solvency. Key steps to ensure solvency after completing the SBRA process include:
- Instituting strong financial controls and cash flow monitoring
- Maintaining a debt-to-income ratio below industry averages
- Meeting obligations under renegotiated agreements with creditors
- Generating consistent quarterly profits and positive cash flow
- Building reserves to withstand future financial shocks
By taking these proactive measures, small businesses can achieve lasting financial stability.
Key Benefits of Using SBRA vs. Chapter 11
The SBRA provides small business debtors with a more efficient path to financial recovery compared to a traditional Chapter 11 bankruptcy. This section examines three key advantages:
Faster Timeline for SBRA Reorganization
The SBRA requires small business debtors to file a reorganization plan within 90 days, significantly faster than the 120 days under Chapter 11 rules. This accelerated timeline helps struggling companies quickly emerge from bankruptcy with their financial house in order.
By expediting the reorganization plan process, the SBRA minimizes business disruptions and allows owners to refocus on sustaining profitability. The tightened 90-day window also reduces legal fees compared to a prolonged Chapter 11 case.
Lower Legal Fees Under SBRA
Small businesses can achieve substantial cost savings with a SBRA restructuring versus a standard Chapter 11 bankruptcy.
SBRA cases involve fewer required hearings, filings, and administrative hurdles that rack up legal expenses. The streamlined process reduces attorney fees by an average of 20-30%.
The SBRA also waives the requirement to pay quarterly trustee fees during the bankruptcy, eliminating another cost burden.
Increased Protections and Obligations
The SBRA strengthens protections for small business debtors while also imposing financial reporting obligations.
Key safeguards prevent creditors from involuntarily pushing a SBRA case into a Chapter 7 liquidation. To receive SBRA protections, debtors must continue making timely tax filings and payments during bankruptcy.
By balancing enhanced protections with ongoing accountability, the SBRA fosters greater success for small companies pursuing financial reorganizations.
Preparing a Reorganization Plan Under SBRA
Creating a confirmable repayment plan is a key part of successfully completing SBRA. This section outlines requirements and strategies for crafting an approvable plan.
Securing Creditor Acceptance of SBRA Plans
To get a SBRA reorganization plan approved, it must be accepted by creditors holding at least two-thirds in amount and more than one-half in number of allowed claims in each class. Here are some tips for achieving these vote thresholds:
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Classify claims thoughtfully based on common interests to avoid forcing unnecessary rejections.
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Negotiate with key creditors before finalizing the plan to address concerns upfront. Offer payment extensions, interest rate reductions, collateral, or other considerations.
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Highlight how the proposed plan provides more than liquidation and is in creditors' best interests long-term compared to forcing a business closure.
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Consider offering a "pot plan" with a fixed percentage payout per class instead of specific amounts per creditor, simplifying the process.
Obtaining Court Confirmation of a SBRA Plan
For a SBRA reorganization plan to be confirmed and binding, the bankruptcy court must find that it meets all requirements of Section 1191(b) of the Bankruptcy Code. Here is what the court looks for:
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Feasible Implementation: The debtor will likely be able to execute the plan and make proposed payments based on earnings projections and capital infusions.
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Good Faith Proposal: The plan demonstrates sincerity and honesty with no intent to misuse SBRA's protections or unfairly manipulate creditors.
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Fair Treatment of Priority Claims: The plan provides for full payment of all administrative and priority tax claims.
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Compliance with Code Requirements: The plan satisfies all confirmation mandates like proper classification and treatment of claims.
Strategies for Repaying Debt Under a SBRA Plan
SBRA plans allow small businesses significant flexibility in structuring debt repayment over 3-5 years. Possible strategies include:
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Extending maturity dates on loans to align with projected cash flows for gradual repayment.
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Reducing interest rates on debt during the plan period to decrease monthly payments.
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Obtaining new credit lines to pay down portions of existing balances over time.
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Using equity, collateral, guarantees, or refinancing to settle certain obligations.
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Capping amounts paid on unsecured claims based on disposable income projections.
Carefully developing an affordable, fair, compliant, and feasible SBRA plan tailored to the small business's situation is essential to solving financial struggles through bankruptcy reorganization.
The Role of Creditors in SBRA Proceedings
Creditors' Influence on the Reorganization Plan
Creditors can have significant influence on a debtor's reorganization plan under SBRA. As stakeholders in the bankruptcy case, they have the right to vote to approve or reject the proposed plan. Their support is important for the debtor to get the plan confirmed by the court.
Some ways creditors impact the reorganization plan include:
- Negotiating with the debtor on the terms of the plan, such as the repayment timeline, interest rates, etc.
- Requesting certain assets be sold or requiring other changes to maximize repayment.
- Forming groups with shared interests to increase bargaining power.
- Objecting to the disclosure statement or the plan if they believe it violates the Bankruptcy Code.
Ultimately the debtor must design a plan that addresses creditors' key concerns in order to gain approval.
Protecting Creditors' Rights in SBRA
The SBRA legislation contains provisions to protect creditors' interests during the bankruptcy process. Some key rights include:
- The automatic stay halts collections, foreclosures, and harassment from creditors while the case proceeds. This prevents a race to the courthouse.
- Secured creditors retain liens or mortgages on the collateral backing their claim. Their secured status is upheld.
- The debtor must give notice to all creditors of key events and deadlines in the case. This ensures transparency.
- Creditors can object if they believe the debtor is acting in bad faith or violating court orders. The judge will review evidence from both sides.
- General unsecured claims cannot be paid less than they would receive in a Chapter 7 liquidation. This establishes a floor for recovery.
While focused on reorganization, SBRA does not compromise well-established creditor protections under bankruptcy law.
Negotiating with Creditors for Debt Relief
To successfully negotiate debt relief with creditors under SBRA, small business debtors should:
- Proactively communicate with major creditors early and often throughout the process. Transparency builds goodwill.
- Make realistic offers based on accurate financial projections and ability to repay. Do not overpromise.
- Offer better terms to key creditors that are essential for the business to operate.
- Be willing to provide creditors specific collateral, guarantees, or other value to offset concessions.
- Listen carefully to creditor demands and be flexible on terms where possible. Compromise is key.
- Treat creditors professionally and emphasize how the proposed terms will provide the best outcome for all parties.
Good faith negotiations, backed by a sound business plan and advisor expertise, can result in win-win debt relief arrangements with creditors under the SBRA framework.
Consequences of Not Following SBRA Requirements
Small business debtors who fail to meet ongoing SBRA guidelines face potential penalties, including dismissal back to standard Chapter 11 bankruptcy, involuntary conversion to Chapter 7 liquidation, and loss of valuable SBRA protections.
Dismissal from SBRA Back to Standard Chapter 11
If a small business debtor does not file required financial reports or meet the SBRA reorganization plan and timeline requirements, the bankruptcy court may dismiss the case. This forces the business to revert to a standard Chapter 11 bankruptcy process without the benefits and flexibilities offered by SBRA rules.
The business would lose valuable advantages like the higher debt limits, reduced reporting burdens, and more flexibility around reorganization plan proposals. Without SBRA status, meeting Chapter 11 requirements can be much more difficult for small businesses.
Chapter 7 Involuntary Conversion Risks
In some cases where a business fails SBRA profitability reporting or does not remain current on post-petition taxes, creditors can request an involuntary conversion of the case to Chapter 7 bankruptcy.
This means a trustee takes over and liquidates the company's assets to pay off debts rather than allowing continued operations under a reorganization plan. An involuntary Chapter 7 conversion can spell the end of the business entirely.
Losing SBRA Protections
If a small business does not comply with its responsibilities under the SBRA process, the bankruptcy court may determine the protections offered are no longer applicable.
This means the loss of valuable SBRA safeguards like the automatic stay, which prevents collection actions against the business during bankruptcy. Without these protections, creditors can take aggressive actions that may severely impact continued operations.
Conclusion and Next Steps Under SBRA
The Small Business Reorganization Act (SBRA) provides important benefits for small businesses facing financial distress. By streamlining the bankruptcy process and reducing costs compared to a traditional Chapter 11 filing, SBRA aims to help more small businesses successfully reorganize and recover from insolvency.
Is SBRA Right for Your Business?
Before pursuing SBRA, small business owners should assess factors like their debt load, revenue streams, and whether the majority of their income comes from business operations rather than investments or rents. Consulting with an attorney can provide clarity on whether a business is likely to qualify and succeed under SBRA. Key considerations include:
- Having no more than $2,725,625 in debt
- Deriving 50% or more of income from business operations
- Possessing a reasonable likelihood of future profitability
If these criteria are met, SBRA may provide the best path for financial reorganization.
Speaking with a SBRA Attorney
Working with legal counsel well-versed in SBRA is highly advisable before committing to this bankruptcy route. An experienced SBRA attorney can assess your specific situation, guide you through eligibility and documentation requirements, develop an effective reorganization plan, and represent your business through the bankruptcy court process.
Choose an attorney familiar with small business finance and operations to ensure tailored strategic advice. Thorough legal guidance is key to successfully navigating SBRA complexities.
Planning for Financial Recovery Post-SBRA
Once the SBRA process concludes, small business owners must take proactive steps for sustainable financial health moving forward. This includes closely monitoring cash flow, keeping stringent financial controls, limiting unnecessary expenses, steering clear of predatory lenders, and continuously evaluating the business' profitability and viability.
Ongoing partnerships with SBRA legal and financial advisors can provide critical accountability and expertise as you rebuild your business. With diligence and patient capital management, financial recovery is very possible after SBRA.
