Filing Chapter 11 Bankruptcy

The new bankruptcy law, which takes effect on February 19, 2020, creates Subchapter V within Chapter 11 of the Bankruptcy Code specifically for small businesses. The new rules will apply only to business debtors with secured and unsecured debts less than $2,725,625, subject to certain qualifications.

The American Bankruptcy Institute, an association of bankruptcy professionals, said in a news release that the new law provides a better path for small businesses to restructure debt, reduce liquidations, save jobs and increase recoveries to creditors while recognizing the value provided by the entrepreneur. Kelvin Birk with Birk Law Firm is a member of ABI, which is one of many ways that he keeps up-to-date on recent developments in bankruptcy law and the most advantageous techniques to use in each bankruptcy case that he files.

Our bankruptcy attorney explains the more noteworthy provisions of the new rules:

A trustee will oversee Chapter 11 bankruptcies. This single court-appointed individual will facilitate development of reorganization plans and oversee each debtor’s compliance with their reorganization plan, such as making timely payments. This is similar to Chapter 12 farmer and fishermen bankruptcies and Chapter 13 business reorganizations.

Only the debtor will be able to propose a plan of reorganization. There is no longer a creditors’ committee to weigh in on the reorganization plan or the debt disclosure document. The Court can confirm a debtor’s plan without the support of any class of claims, as long as the plan does not discriminate unfairly and is deemed to be fair and equitable with respect to each class of claim.

Easier for Chapter 11 debtors to keep their businesses. The “absolute priority rule,” which generally requires full payment to creditors to avoid closing the business, is eliminated in favor of the “fair and equitable” standard based on the debtor’s projected disposable income. A fair and equitable reorganization plan should be confirmed as long as it provides one of two options for how the company will repay its creditors: 1) by all of the debtor’s projected disposable income being applied to payments 2) through distribution of some or all of the company’s property, as long as its value is not less than the projected disposable income of the debtor.

The new value rule is eliminated. Those who hold equity in a small business in Chapter 11 bankruptcy no longer need to establish a “new value” for their share to retain their ownership interest in the business.

The debtor may be able to modify their residential mortgage. The reorganization plan can modify the rights of a creditor secured by a security interest in the debtor’s principal residence if the loan secured by the residence was used in connection with the debtor’s business but not used to acquire the residence.

Shorter filing timetable. The Bankruptcy Court is to hold a status conference within 60 days of the petition date and the debtor is to file a reorganization plan within 90 days of the petition date under the new law. Previously, a small business debtor had up to 300 days to file a plan. The new rules require the debtor to appear at only one Bankruptcy Court status conference. However, the reorganization plan itself may still stretch payments over three to five years.

Administrative charges rolled into repayment plan. Administrative expense claims – such as the costs of post-petition goods and services – can be paid over the term of the reorganization plan instead of on the effective date of the plan.

The SBRA ensures that small businesses will be able to reorganize their financial affairs effectively under the Bankruptcy Code, American Bankruptcy Institute Executive Director Samuel J. Gerdano said in the news release.

“With proper planning and execution, the Small Business Reorganization Act enables financially troubled small businesses to emerge from bankruptcy within months following a court-approved plan of reorganization,” Gerdano said.