A man in a black suit holding up a rectangular sign that reads bankruptcy with one hand

New Bankruptcy Law for Small Businesses

The Small Business Reorganization Act of 2019 will go into effect in February 2020. The Act creates a new Subchapter V under Chapter 11 of the US Bankruptcy Code and is intended to streamline the process for small business reorganizations and make restructuring faster and less expensive.

The Act 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. The new rules apply to business debtors with secured and unsecured debts less than $2,725,625, subject to certain qualifications.

Here are some of the highlights of the Act:

There are some questions that remain unanswered under the Act. For example, it is not clear what interest rate will apply to secured loans under confirmed plans—whether the contract rate or some presumptive rate established by local rule, as is the case with Chapter 13 cases in many jurisdictions. It is also not clear how courts will apply prior Chapter 12 and Chapter 13 precedents to new Subchapter V cases.

The Act could also have an impact on many lenders. Lenders should be aware of the ramifications of the SBRA, as the new law will likely result in increased bankruptcy filings by smaller, family-run businesses that had previously been unable pursue reorganization under Chapters 11 and 13 of the Bankruptcy Code. Debtors will be able to more easily obtain confirmation of plans over creditor dissent and to cram lenders down on the value of residential collateral used for business loans.

Nevertheless, the new rules should generally result in a faster process that overall may reduce costs for creditors and provide greater chances of repayment due to the involvement of a trustee. And financially troubled small businesses will certainly have a better opportunity to avoid liquidation and achieve reorganization under the Act.