The Preparation Process

We help prepare businesses for financial restructuring under Subchapter V of the Chapter 11 Bankruptcy Code

The Small Business Reorganization Act of 2019 (“SBRA”), became law on February 19, 2020, and was enacted by Congress specifically to provide a streamlined and cost effective method for small businesses to recover from financial distress.

The Preparation Process

I guide business owners through the confusing and time-consuming process of preparing to restructure their company’s debt by helping them:

Consider all restructuring alternatives, including Subchapter V
Arrange a free initial consultation with a bankruptcy attorney
Develop a realistic 3-year financial forecast
Prioritize operating and financial issues and recommend immediate solutions
Seek non-bank sources of debtor-in-possession (“DIP”) financing

Build a digital vault that includes all of the disclosure documents and financial data required by your bankruptcy attorney or turnaround advisor
Make a decision and execute on a plan of action to save their business
By continuing to act as an advisor and mentor to distressed business owners, directors and company management

The Small Business Reorganization Act (“SBRA”) became effective on February 19, 2020 and is intended to reduce the barriers that once prevented small businesses from effectively reorganizing by adding “Subchapter V” to Chapter 11 of the Bankruptcy Code to alleviate many of the burdens of small business reorganization through the following mechanisms:

Key Features of a Subchapter V Reorganization

Automatic Appointment of a Trustee

Upon filing a Subchapter V petition, a Trustee is appointed to oversee the case, whose primary function is to “facilitate a consensual plan of reorganization” – in other words, a plan in which all impaired creditors vote to confirm the plan.

Absolute Priority Rule Eliminated

Creditors who are impaired under a plan of reorganization lose their absolute right to reject a plan, as the Subchapter V debt has significantly more power to “cram down” a non-consensual plan so long as the debtor contributes all of its disposable income for a period of 3 to 5 years, as the court may determine. The “absolute priority rule” refers to the requirement in Chapter 11 that impaired creditors must receive at least the value to which they would be entitled in a hypothetical Chapter 7 liquidation of the business; under Subchapter V the court has more discretion to determine what is “fair and equitable” under the circumstances.

New Value Rule Eliminated

Equity holders of a small business debtor need not provide “new value” to retain their equity interest if creditors are not fully paid. To confirm a reorganization plan, the only requirement is that the plan does not discriminate unfairly, is fair and equitable and, provides that all of the debtor’s projected disposable income will be applied to payments under the plan or the value of property to be distributed under the plan is not less than the projected disposable income of the debtor.

Administrative Expense Payments Delayed

Unlike a typical bankruptcy, a small business debtor may pay administrative expense claims over the term of the plan, rather than requiring the debtor to pay administrative expense claims – including claims for post-petition goods and services – on the effective date of the plan.

No Impaired Class Required

Under Subchapter V, a court may “cram down” a non-consensual plan even where no impaired class creditor has voted to confirm the plan. Traditionally, at least one impaired creditor vote to confirm is required to cram down a Chapter 11 reorganization plan.

Discharge

Debtors under Subchapter V are entitled to a discharge, either upon confirmation (for consensual plans) or after the first three years of payment for non-consensual plans. As a result, the Creditor’s rights are immediately extinguished as to the pre-petition debt, and only the right to receive plan payments under the reorganization plan survives.

Principal Residence Loans Modified

Where a business owner borrows against their primary residence in order to finance the business, Subchapter V allows the debtor to modify such loans in the reorganization plan. Conversely, a debtor may not modify a first-position purchase money mortgage.

The CARES Act Extension

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides fast and direct economic assistance for American workers and families, small businesses, and preserves jobs for American industries.

The CARES Act expanded the debt limits for filing as a small business under the Small Business Reorganization Act of 2019 (“SBRA”), from under $2,725,625 million to $7.5 million. In doing so, Congress greatly expanded the availability of reorganization under SBRA to businesses that would not have previously qualified. However, the increased debt limits are only available to filers who commence a reorganization on or before March 27, 2021. As a result, businesses who might otherwise not be eligible to reorganize under the SBRA should consider filing before March 27, 2021.

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The CARES Act expanded the debt limits:

$2.725 MILLION
to
$7.5 MILLION