Chapter 11 bankruptcy is not an easy process, and rules have traditionally favored large businesses. Now, distressed small businesses will have a better chance at reorganization under a new subchapter of the federal bankruptcy code.
The Small Business Reorganization Act of 2019, which will go into effect on Feb. 19, 2020, makes Chapter 11 reorganization a more affordable and feasible process for small businesses. Under the new law, individuals and companies with roughly $2,725,000 of debt (at least 50 percent business debt) may reorganize under a new subchapter that makes the process faster and more affordable.
Notably, the act establishes that an independent trustee will be appointed to oversee the bankruptcy process. That coincides with the elimination of creditor committees and court-approved disclosure statements.
Additionally, the act removes creditor voting and approval requirements. Under a traditional Chapter 11 bankruptcy, a class of creditors must approve the plan in order for it to be confirmed. Now, in qualified small business cases, the court can determine a proposal is fair and equitable over creditor objections.
Finally, the absolute priority rule no longer applies. That rule prohibited business owners from retaining equity, unless all creditors were paid in full. Now, small business owners can maintain an ownership interest, even if creditors are not fully compensated.
Better outcomes overall
Previous requirements scared off many would-be filers. Of those that did make an attempt, less than 27 percent of filings resulted in confirmed plans of reorganization, as reported by law.com. The changes are designed to reduce costs and improve a debtor’s ability to survive the bankruptcy process.
Creditors will no longer be able to block small business reorganization plans. With an independent trustee in place, and court control over plan approval, rulemakers hope the process will lead to better overall returns for claimants.
Veterans and farmers
President Donald Trump also signed legislation extending bankruptcy relief to farmers and veterans. Under the Family Farmer Relief Act of 2019, the debt ceiling for a family farm more than doubled.
Similarly, under the Honoring American Veterans in Extreme Need Act of 2019, Congress expanded access to relief for veterans filing under Chapter 13. The change shields veteran disability payments from being considered the type of income individuals must devote to creditors.