According to the Small Business Administration, there are 27.9 million small businesses, which account for:
If you are a sole proprietor running your business in your name or under a “Doing Business As” name, you can reorganize your business debts under Chapter 13 of the Bankruptcy Code, or you can liquidate your business under Chapter 7.
If you incorporated your small business, but for any number of reasons, you do not wish to continue operations, bankruptcy may or may not be right for individual owners or the corporation.
There are several issues to consider, but by far, the most critical question is whether the corporate shareholders have personally guaranteed any of the business debt.
If so, the shareholders must each assess their financial situation and determine whether to file a personal bankruptcy under Chapter 7 or Chapter 13 of the Code.
In most cases, a small incorporated business ceasing operations does not need to file a bankruptcy.
The typical small business can usually liquidate its assets on its own, paying priority creditors first ~ usually taxes and wages ~ then, with any remaining proceeds, paying pro-rata distributions to general unsecured creditors.
An unpaid creditor can, of course, sue the corporation, and the small business owner may have to appear on the lawsuit as the corporate custodian.
If the owner wishes to avoid going to court on behalf of the failed business, the corporation can file a Chapter 7, triggering the automatic stay, which typically stops all litigation.
Despite being the backbone of our economy, small businesses have historically received little assistance from the U.S. Bankruptcy Code.
Big companies of every industry have utilized Chapter 11 of the Bankruptcy Code to reorganize their cash flow, so that monthly business income matches monthly business.
However, small business bankruptcy debtors have traditionally struggled to reorganize effectively under Chapter 11 because the process is too cumbersome and expensive.
All too often, small business owners give up rather than fight the uphill battle of Chapter 11.
In 2020, the prospects for small businesses bankruptcy improved tremendously because the Federal government enacted two significant pieces of federal legislation February and March of 2020, New federal laws make filing a small business bankruptcy the easiest it has ever been.
The Small Business Reorganization Act of 2019 (SBRA), which became effective in February of 2020, is technically known as Subchapter V of Chapter 11 of the Bankruptcy Code and is specific to small businesses. Congress designed the SBRA to:
Compared to Chapter 11, the SBRA is efficient and straightforward.
It eliminates many costly elements of Chapter 11, such as disclosure statements.
Subchapter V takes aspects from the expedited procedures used in Chapter 12 and 13 cases.
At the time of enactment, if your business has total debts (both secured and unsecured), subject to specific qualifications, of less than $2,725,625, it can reorganize under SBRA.
However, The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), created in response to the financial catastrophe caused by the COVID-19 pandemic, was enacted on March 27, 2020.
The CARES Act raises the small business debt limit to $7,500,000 until March 27, 2021.
• Eligibility: The SBRA has a debt limit of $7.5M until March 27, 2021. After that, unless Congress extends this provision of the CARES Act, the debt limit will drop to $2,725,625.
• A trustee is appointed: Unlike Chapter 11, the SBRA requires the United States Trustee to appoint a standing trustee (known as a “pool trustee”) in every case.
Their duties are much like a Chapter 13 trustee.
Debtors pay SBRA Plan payments to the trustee, who then disburses proceeds per the Plan of Reorganization, once confirmed by the judge.
• No unsecured creditors committee: The appointment of an unsecured creditors committee adds a lot of expense to a traditional Chapter 11 case. Subchapter V cases do away with this expense unless there is a show of cause to the Court that such a committee is necessary to accomplish an effective reorganization.
• The Court holds a case management conference: Within 60 days of filing the petition, the Court holds a case management conference to measure case progress and ensure case progression.
• Plan of Reorganization: Under Subchapter V, the debtor has 90 days to file the Plan of Reorganization.
The Court can further extend this deadline if necessary.
The Subchapter V Plan differs significantly from both Chapter 11 plans and Chapter 13 plans. Here are its significant features:
• Confirmation of the Plan: The plan will be confirmed (approved by the judge) if it is feasible, does not unfairly discriminate, and is fair and equitable to the non-consenting, impaired classes of creditors.
• Discharge: The Court will grant a discharge when the debtor completes all payments due under the plan.
All debts are discharged except:
As with any new piece of legislation, the SBRA leaves unanswered questions about Subchapter V of Chapter 11:
As more SBRA cases are filed, litigation between debtors, trustees, and creditors will result in increased guidance from bankruptcy judges.
Unlike Chapter 7 and Chapter 13, small business bankruptcy cases are all very different.
Therefore, they are tough to pin down on costs.
Generally, the cost of legal services is a function of the time involved, the complexity of the matter, and the experience of the lawyer. Small business bankruptcy is no different.
However, unlike almost every other area of legal practice, the bankruptcy judge must approve attorney fees charged to the debtor.
The judge looks at factors such as time expended and results obtained before determining whether attorney fees are reasonable.