By Michael S. Wrona

On August 23, 2019, President Trump signed into law several amendments to the Bankruptcy Code known as the Small Business Reorganization Act (“SBRA”). These amendments represent some of the most extensive changes to the Bankruptcy Code since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The SBRA adds a new subchapter to Chapter 11 aimed at decreasing the time and financial expenses typically involved in filing a Chapter 11 case. For some time, Debtors’ counsel have argued that the fees and costs of a Chapter 11 are substantial and actually present a significant barrier to a bankruptcy filing. The SBRA sought to address this concern by eliminating the United States Trustee quarterly fees, the need for a disclosure statement, and a creditors’ committee.

Under the SBRA, a “small business debtor” is a business entity or an individual engaged in business and whose aggregate non-contingent debts do not exceed $2,723,625 and who also elects to be treated as a small business debtor. The other notable differences between a case involving a small business debtor and other Chapter 11 cases are:

———-(1) Only a small business debtor may file a chapter 11 plan but must do so with 90 days of filing (as opposed to all other Chapter 11 cases where creditors can file plans after the case has been pending more than 120 days). A small business debtor may get an extension but only due to “circumstances for which the debtor should not justly be held accountable”.

———-(2) A trustee (similar to Chapter 13 cases) will be appointed to oversee each case.

———-(3) The Chapter 11 plan can now modify the rights of a secured creditor holding a secured interest in the debtor’s principal residence if the loan securing the residence was not used to secure the residence but was used in connection with the debtor’s business.

———-(4) The small business debtor’s plan can be confirmed without the support of any class of creditors as long as the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims.

———-(5) To be fair and equitable, the plan must provide that all of the debtor’s projected disposable income to be received during the term of the plan be applied to plan distributions.

The elimination of the creditors’ committee and quarterly fees coupled with the shorter confirmation period and less strict confirmation requirements ensure the SBRA has addressed its primary objective of lowering the bankruptcy costs for the small businesses.

It should be noted that the Chapter 11 trustee appointed to a small business case will oversee the claims process and distributions for those claims, but the debtor will continue to operate as a debtor-in-possession. However, the SBRA provides the small business debtor much of the same discretion as a typical Chapter 11 debtor, which leads to some ambiguity as it is unclear which party will be responsible for claim objections or avoidance actions. That is clearly something that will be addressed through practice and, perhaps, caselaw. Finally (and perhaps of most significance to most lenders), the SBRA allows small business debtors to modify the rights of a secured creditor even if that claim is secured only by an interest in the debtor’s primary residence provided the loan was “not used to primarily acquire” the property and the loan was “used primarily in connection with the small business of the debtor.”

Taken as a whole, the relatively less-stringent confirmation requirements and fewer administrative fees should encourage more Chapter 11 bankruptcy filings for those who qualify as small business debtors. As with any new legislation, it will be interesting to see how the caselaw concerning SBRA develops, specifically whether bankruptcy courts will look to and apply Chapter 13 concepts and interpretations, or, instead, provide the small business debt more of the discretion found in conventional Chapter 11 cases.

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