CARES Act Raises Small Business Bankruptcy Limits

04.02.2020

Congress recently passed the Coronavirus Aid, Relief and Economic Security Act of 2020 (CARES Act), the $2 trillion stimulus bill intended to help businesses, families, and individuals, through the financial crisis created by the COVID-19 pandemic.

The CARES Act includes special loan programs and other concessions to businesses in financial distress as a result of the restrictions on social gatherings and nonessential activities. Currently, 33 states and the District of Columbia have a “shelter in place” type order in effect.

Last year Congress enacted the Small Business Reorganization Act of 2019 (SBRA), which created a streamlined  process for small, financially distressed business to reorganize. The simplified reorganization process was, however, limited to businesses with less than $2,725,625 in debt, rendering thousands of small businesses ineligible to take advantage of the SBRA.

Importantly, the CARES Act increases the debt limit under the SBRA to $7,500,000 for the next year. This nearly three-fold increase means that many thousands of additional businesses can take advantage of SBRA’s benefits. 

The following is a summary of some of the key benefits of SBRA:

• Plan Confirmation Is an Easier Process. While a plan under SBRA must still be fair and equitable and cannot discriminate unfairly, a SBRA debtor can confirm its plan even if no class of creditors has voted to accept the plan. With a traditional chapter 11 plan, unless at least one “impaired” class of creditors votes to accept the plan, the plan cannot be confirmed.

• SBRA Requires Fewer Formalities. While a trustee will be appointed to oversee an SBRA case, SBRA eliminates virtually all committees, resulting in significant cost and time-saving to the debtor. In addition, a disclosure statement is not required to accompany the plan in an SBRA case.

• Reorganization Plans May Be Shorter. Under SBRA, a plan will typically be at least 3 years long and may not exceed 5 years.

• SBRA Eliminates U.S. Trustee’s Fees. The SBRA does away with the requirement that a debtor pay a quarterly fee to the Office of the U.S. Trustee.

• SBRA Takes into Consideration Individual Expenses As Well As Business Expenses. The debtor must dedicate disposable income to creditor payments, but disposable income is net of payments necessary for (a) the business of the debtor, and (b) the maintenance and support of an individual debtor as well. This broad definition of  “disposable income” makes SBRA particularly well-suited to the reorganization of professional practices such as dentists, lawyers, etc.

Note that the debt limit increase to $7,500,000 under the SBRA expires in one year, after which (in the absence of a Congressional extension) the limit will revert back to $2,725,625.

Whether you would like to explore options for your business under the SBRA, have other questions about restructuring or financial relief in these uncertain times, or have financially distressed tenants or customers, the Hirschler Restructuring and Creditors Rights Team is here to help.

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The Hirschler Recovery Team: It may soon be a rare business enterprise that is able to insulate itself from the negative economic effects of the COVID-19 pandemic.  While we hope the economy will rebound once the pandemic begins to abate, until then, the Hirschler Restructuring and Creditors Rights Group stands ready to assist clients in addressing the financial challenges of these economically unsettled times.  Whether you are facing the loss or interruption of business, challenging financing relationships, the need to downsize or restructure, or other creditors’ rights issues, the Hirschler team will work with you toward a successful outcome.  Contact us to understand your options and devise a recovery strategy that protects your business and financial health.