CARES Act Enhances Eligibility for Small Businesses to Declare Bankruptcy

On February 19, 2020, the federal Small Business Reorganization Act (SBRA) took effect, providing qualifying small businesses access to a streamlined and less expensive version of the traditional Chapter 11 bankruptcy process. On the heels of SBRA, and in light of the coronavirus outbreak, the March 27, 2020 enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided further relief and opportunity to small businesses by including particular bankruptcy provisions.

Eligibility to File Bankruptcy under the SBRA and CARES Act

The SBRA allowed a business with no more than $2,725,625 in secured and unsecured debt to use the new procedures. The CARES Act expanded that limit to $7,500,000, for bankruptcy filings made from now until March 27, 2021. The debtor (which can be an individual or company) must be engaged in commercial or business activity with at least 50% of the debt arising from such activity. Single asset real estate cases are excluded.

Primary Benefits of the New Process

  • Reduced Costs. Traditional Chapter 11 cases carry significant costs and uncertainty, which prompted many small businesses to liquidate instead. The SBRA, as expanded by the CARES Act, aims to reduce these costs and make reorganization viable for small businesses. One way it accomplishes this is by allowing only the debtor to file a plan, which avoids litigation against competing creditor plans. Other ways include sparing the debtor from having to file a formal disclosure statement, having to pay U.S. Trustee fees, and being subject to a creditor committee.
  • Faster Process. The speed of the new process will also reduce costs. A plan of reorganization must be filed within 90 days of the filing of the bankruptcy petition. All of the debtor’s disposable income must be dedicated in payments to creditors, and the plan must cover three to five years. In addition, the requirements for creditor acceptance of a plan are less stringent than under traditional Chapter 11. If the debtor completes its plan payments, it will receive a discharge of its remaining debts. These provisions will reduce pressure from creditors and promote consensus in pursuing the ultimate goal—confirmation of a plan and preservation of the debtor’s business and the jobs it provides.
  • Debtors Can Retain Property. The SBRA allows small business owners to retain their interests in the business, even when creditors might not be paid in full under the plan. Although a case trustee is appointed to facilitate a plan, the debtor remains in control and possession of its business. The trustee’s duties are focused on obtaining a consensual plan among the debtor and creditors.

The provisions of the SBRA and CARES Act are expected to be utilized in the coming months by numerous small businesses that are under duress and are seeking less expensive remedies than the traditional Chapter 11 process.