SBRA: Better Bankruptcy for Small Businesses
February 20, 2020
Bankruptcy reorganization can turn a bad deal into a good one.
“My creditor clients would rather take a bad deal and make it a good deal any day,” bankruptcy and creditor rights attorney Kristina Stanger says. “That’s what makes me passionate—being able to save jobs, turn companies around, restructure debt, and hopefully take a bad deal and turn it into a good deal.”
For debtors and creditors, the Small Business Reorganization Act (SBRA) makes the process faster, cheaper, and easier for qualified small businesses.
Effective February 19, 2020, the SBRA adds Subchapter V to Chapter 11 of the U.S. Bankruptcy Code.
Small businesses with debts of $2,725,625 or less may take advantage of the SBRA. The new provisions include:
- A status conference is required to be held within 60 days after the petition is filed, which should expedite resolution.
- Only the debtor may file a reorganization plan.
- The plan must be filed within 90 days after a petition is filed.
- A trustee—not a creditors committee—is to be appointed for each case.
- A loan secured by the debtor’s principal residence can be modified if the proceeds were used primarily in connection with the business, not primarily to purchase the home.
- The court can confirm a debtor’s plan without the support of the creditors as long as the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims.
- The plan must provide that all of the debtor’s projected disposable income will be applied to plan payments for three-to-five years.
- It may be possible for the small business owner to retain ownership of the business even if all creditors are not paid in full.
“These key provisions allow qualifying small businesses to reorganize and retain the potential to succeed,” Kristina says. “There is opportunity for both debtors and creditors in restructuring. The quicker a small business can reorganize and emerge from bankruptcy, the better for a creditor that is relying on future business opportunities being available for the small business.”
The SBRA also changes how preference actions are handled. Money paid to a creditor by the debtor during the 90 days before a bankruptcy filing might be subject to a “claw-back,” where the creditor may be sued to repay the debtor on the grounds that the creditor had received preferential treatment.
The treatment of “preferential” payments under the SBRA should provide benefits to creditors, in that now:
- For amounts less than $25,000, the debtor or trustee must bring a recovery action in the creditor’s home jurisdiction, rather than the jurisdiction where the bankruptcy is pending; and
- The debtor and trustee must conduct reasonable due diligence and take into account a creditor’s defenses before bringing a lawsuit to recover a preferential payment.
The new venue provision forcing a claimant to bring an action in the recipient creditor’s home jurisdiction is of obvious benefit. The additional requirement that the trustee or debtor must exercise “reasonable due diligence” and consider the creditor’s affirmative defenses before filing suit means that a party asserting a preference may now be required to dig into financial records and evaluate possible defenses. Such review may include determining what had been the ordinary course of business with regard to payments, and undertaking other financial analyses.. The result may tend to “level the playing field” for the creditors involved, and eliminate placing on the recipient creditor the entire burden of proving that a payment had not been preferential.
The long-term implications of the SBRA for small-business owners and creditors will continue to develop. For creditors, prior standard approaches, defenses, response letters, and data analyses may no longer be the best strategy.
Nyemaster Goode’s bankruptcy and creditor rights attorneys will continue to evaluate the status of the law. Contact your attorney to determine the right strategy under SBRA for your situation.