What is the Small Business Reorganization Act?

Highlights of the New Bankruptcy Chapter: Chapter 5

Many small businesses could not afford the processes in place under Chapter 11. The SRBA, signed into law in August 2019, created Chapter 5 and was intended to provide a “fresh start” to small business owners. This article highlights some of the key issues under the new law.

On August 23, 2019, a relatively small, 22-page bill known as the Small Business Reorganization Act of 2018 (SBRA), was signed into law by the President of the United States.

The law would become effective six months later on February 19, 2020, only weeks before a worldwide pandemic was announced that would bring the U.S. economy to a halt.

What is the SBRA?

In technical terms, it is a new bankruptcy chapter, Chapter 5, and, at the same time, is a subchapter of the current U.S. Chapter 11 code created in 1978. In practical terms, it is being called “A Better Road to Reorganization for Main Street Businesses (American Bankruptcy Institute).

Chapter 11 is very costly, very contentious (between creditors and debtors), very time consuming, and has many regulations that slow down the process of an eventual exit from bankruptcy. Chapter 5 aims to streamline the Chapter 11 process.

What is the Intent of the SBRA?

Many small businesses that were facing financial challenges and wanted to stay in business and restructure were in limbo when it came to bankruptcy options. They were too small and could not afford the time-consuming and difficult Chapter 11 reorganization process. As a result, these small businesses attempted to restructure privately, without the protection of the bankruptcy courts. Many did not make it through the process and ended up closing their doors.

What is Different About SBRA v. Chapter 11?

The changes are designed to speed up the process, simplify the process, and give the borrower company more control; make it less costly so that it has a better chance of exiting bankruptcy in a stronger position.

Number of days to file a plan: 90 days compared to 300 for Chapter 11

Creditors’ Committee and Control: no creditors’ committee required. Under Chapter 11, creditor committees added time and expense, and one unsatisfied creditor could hold up the whole process. Under the new Chapter 5, the debtor company is in control, thus giving them a better chance to exit bankruptcy and not have to liquidate.

Trustee: Chapter 5 retains the trustee; however, debtor companies can spread the trustee commissions over the life of the reorganization.

Absolute priority rule: this is a rule under the existing Chapter 11 that ranks creditors according to how much or when they will be repaid (also known as preference of payment). This rule has been eliminated under chapter 5, enabling the debtor company to have more flexibility in giving all creditors a chance to recoup a portion of their balances.

Payment to Creditors

Similar to a personal Chapter 13 bankruptcy five-year plan, under Chapter 5 a debtor may make payments of residual or disposal income over a three- to five-year period.

This list of differences is not comprehensive and is intended to provide some highlights of the new code.

What Does it Mean to Your Business?

With many small businesses facing an uncertain future from the economic fallout of the pandemic, this new Subchapter 5 may be a lifeline. Bankruptcy laws are complex, and you should always consult with your trusted advisor and attorneys. A qualified valuation professional can help business owners with a solvency analysis as you consider your options.

This article was previously published by SobelCo, June 12, 2020, and is re-published here with permission.

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Michael Bankus, MBA, CVA, is principal of Goriano Experts & Advisors, a consulting firm serving the legal and business communities with a business valuation, business consulting, and litigation support services, mainly to the construction industry. Previously, Mr. Bankus held senior finance roles with The Bank of New York Mellon, P.N.C. Financial, CentiMark Roofing, USF&G Insurance, and Rite Aid Corporation.

Mr. Bankus can be contacted at (484) 557-6644 or by e-mail to Mike@GorianoLLC.net.