Call Us For A Free Consultation






Small businesses have long struggled to reorganize under the bankruptcy law. Often times, they have intentionally steered clear of filing for bankruptcy protection because of the daunting costs and long shot odds of successful reorganization. The Small Business Reorganization Act of 2019, enacted on August 23, 2019 and taking effect this month, may prove to be the best thing that happened to small business when it comes to reorganization. It created a new subchapter V for chapter 11 small business debtors.

I am excited about the prospect of using this tool for two significant reasons. First, it should streamline the existing bankruptcy process for small businesses and make it easier to reorganize. The Act takes some inspiration from the chapter 12 and chapter 13 reorganization process. A trustee is appointed in every case to monitor the case and make payment distributions to creditors, similar to a chapter 12 or 13 case, but will not take control of business operations. The process for plan approval is simpler and more efficient than before. Typically, no unsecured creditor committee will be appointed, unless ordered by the court for cause. Also, only a debtor may file a plan of reorganization. The debtor has 90 days from the date of the order for relief to do so (unless extend by the court), which in most cases is the date of filing.

The process, in most cases, should prove less costly. A business debtor will no longer be required to file a disclosure statement, only a plan of reorganization that may include some explanations normally found in a disclosure statement. Additionally, a plan may modify the rights of a secured creditor with a lien on the debtor’s principal residence if the funds received from the loan were used primarily (greater than 50%) for the benefit of the small business. This represents a sweeping departure from chapter 13 orthodoxy, which does not allow modification of secured liens if there is any equity in the residence.

To qualify under the Act, a small business debtor must have non-contingent liquidated secured and unsecured debts totaling no more than $2,725,625 (the current amount, which is subject to change in the future). Relief is available to business entities and individuals. Even if a debtor qualifies, it is important to note that it need not avail itself of relief provided for under the new subchapter V. A debtor is entitled to choose between the new form of relief or stick with the prior form of reorganization. The plan length, similar to chapter 13, may be from 3 to 5 years and all disposable income needs to be dedicated to the plan.

To help determine if the new subchapter V is appropriate for your business, please call my Philadelphia or Montgomery County offices at (215) 344-8343.