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New bankruptcy law could save a lot of small businesses

Updated June 23, 2020 - 12:58 pm

A new bankruptcy law may be the assistance small businesses need to survive the worst economic crisis since the Great Depression.

When the Small Business Reorganization Act (SBRA), commonly known as “Subchapter 5,” went into effect Feb. 19, no one could have foreseen that by March 2020, the U.S. economy would be catastrophically impacted as a result of the Covid-19 global pandemic. The financial consequences of the coronavirus have hit small businesses and especially Nevada businesses hard.

The new Subchapter 5 Bankruptcy provides a much-needed lifeline for the many small businesses struggling to survive this economic crisis. My primary goal is to assist small businesses during this economic downturn. The Subchapter 5 filing is much simpler, more economical and quicker than a traditional Chapter 11 bankruptcy, enabling businesses to restructure debt quickly and move forward to stabilize future financial success.

The SBRA was long overdue, and as it turns out, timelier than anyone would have ever anticipated. Subchapter 5s could mean the difference between survival and liquidation for many businesses.

Subchapter 5 allows small business debtors a process to reorganize that was economically prohibitive and more onerous under a traditional Chapter 11. It was designed to address several Chapter 11 concerns for small businesses. Chapter 11 is a lengthy and complicated process for many small businesses. Further, Chapter 11 has expensive creditor committees and onerous procedural and reporting burdens leaving reorganization an unviable option for small business.

Subchapter 5 was enacted specifically to address the unique concerns of small business while easing the time, expense and burdens of the typical Chapter 11. The SBRA statute is tailored for the small business debtor. In order to qualify as a debtor under Subchapter 5, the SBRA debt limits were originally set at $2,725,625. However, as a result of the CARES Act, the debt limits have been raised to $7,500,000, opening the door to still more businesses needing to eliminate or restructure debt in this unprecedented time.

Some of the key benefits of filing bankruptcy under Subchapter 5 include:

• An expedited case schedule, including early status conference and a plan submission deadline of 90 days.

• Owners are able to retain their interests in their business, and there is no “new value” rule applied to equity holders.

• No unsecured creditors committee is appointed.

• A plan will generally be confirmed as long as all the debtor’s disposable income is used to make plan payments to creditors for three to five years.

• If the debtor completes the payments required under a confirmed plan, it receives a discharge of the remaining debt.

To file under a Subchapter 5, a business is required to provide its most recent balance sheet, statement of operations, cash flow statement, a federal income tax return (or a sworn statement that such a document does not exist). The plan must be submitted for approval within 90 days, so in Subchapter 5 filings, much more of the detailed work would have to be completed between the client/petitioner and their attorney ahead of time. The new statutory relief is making all the difference between a business being able to weather the storm or having to close its doors.

Brigid M. Higgins is a bankruptcy attorney at Black & LoBello Attorneys at Law. She has concentrated her practice in business restructuring, bankruptcy litigation and creditor’s rights for over 23 years.

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