For small businesses needing to file bankruptcy to save their company, Subchapter V of Chapter 11 of the Bankruptcy Code (the “SBRA”) within the Small Business Reorganization Act is a great option. The new subsection, which took effect in February 2020, creates a more streamlined and less expensive Chapter 11 reorganization path for small business debtors. (See previous article here.)
Even better news, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was signed into law on March 27, 2020, will also expand the number of small businesses eligible for relief during the COVID-19 pandemic.
Currently, to be eligible for Subchapter V, a debtor (whether an entity or an individual) must be engaged in commercial activity and its total debts – secured and unsecured – must be less than $2,725,625. Under the CARES Act, the debt ceiling will be raised to $7,500,000.
Important to note, however, is that 50 percent of those debts must still come from business activity (excluding debts owed to affiliates or insiders), and the debtor’s principal activity cannot be a single-asset real estate operation. Additionally, the small business would need to file bankruptcy within one year of the effective date of the CARES Act and elect to proceed under the SBRA.
The temporary but substantial increase in the SBRA debt limit to $7,500,000 will allow many more small business debtors the opportunity to stay in business, retain employees and reorganize under SBRA while benefiting from SBRA’s streamlined procedures, 3- to 5-year repayment plan term and reduced cost structure.