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Small Businesses: What You Need to Know About Important Changes to Bankruptcy

David W. deBruin

David W. DeBruin

By David W. deBruin, Esq.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted to provide emergency financial assistance for individuals, families and businesses affected by the COVID-19 pandemic. A lesser publicized part of the CARES Act made some very important changes to various provisions of the United States Bankruptcy Code that could significantly impact bankruptcy cases filed by small businesses as well as individuals. This article will briefly summarize the changes that affect small businesses in financial distress.

In February of this year (unrelated to the pandemic), the Small Business Reorganization Act (SBRA) became effective. The SBRA enacted new provisions under Chapter 11 of the United States Bankruptcy Code, which are commonly referred to as Subchapter V. Subchapter V aims to give businesses with debts under a certain threshold a faster and less expensive option for reorganizing under Chapter 11 to counter the argument that the costs and complexities of Chapter 11 simply make it too expensive and difficult for small businesses to successfully reorganize.

The Subchapter V process moves at breakneck speed compared to most traditional Chapter 11 standards. The debtor must file its plan of reorganization within 90 days from the date of its initial filing. Additionally, only the debtor may file a plan. This differs from a regular Chapter 11, under which creditors or other parties in interest may file a plan on behalf of the debtor if the debtor fails to do so within a certain time. Under the provisions of Subchapter V, a plan will generally be confirmed so long as it provides that all of the debtor’s projected disposable income for three to five years will be used to make plan payments. Projected disposable income is everything after expenses to maintain and support the debtor and expenditures necessary for business operations.

A Subchapter V debtor does not need to file a formal disclosure statement. This is a standard Chapter 11 requirement designed to provide creditors with sufficient information to analyze and vote for or against the debtor’s proposed plan of reorganization. In practice, the disclosure statement can lead to protracted disputes and delays as the various parties argue over the adequacy of the debtor’s disclosures. As an alternative to a disclosure statement under Subchapter V, the plan of reorganization must include a brief history of the business operations, a liquidation analysis, and projections demonstrating the ability of the debtor to make the proposed plan payments.

Under the SBRA, a business qualifies to file a case under Subchapter V if it has debts of $2,725,625 or less. The CARES Act increases the debt limit to $7.5 million, enabling businesses with debts of $7.5 million or less to now qualify to file cases under Subchapter V. This change in the debt limit applies only to new cases filed after the CARES Act became effective on March 27, 2020, and is applicable for one year only. After one year, the debt limit for cases under Subchapter V reverts back to $2,725,625, absent an extension or some further action by Congress.

While it seems lenders, landlords, vendors, suppliers, and federal, state, and local authorities are working together to keep small businesses from failing, the CARES Act modifications offer greater leeway to more businesses to file a Chapter 11 reorganization if those efforts prove insufficient. The Corporate Restructuring and Commercial Bankruptcy practitioners at Gawthrop Greenwood stand ready to help.

David deBruin is a partner in Gawthrop Greenwood’s Restructuring and Corporate Bankruptcy department. During his 24 years in practice — in addition to representing corporations and debtors-in-possession — deBruin has also represented banks, lenders, investors, lessors, leaseholders, creditors, purchasers, creditor committees, chapter 7 trustees and preference defendants in bankruptcy courts located in Delaware, Pennsylvania, and New Jersey.

For more information on Gawthrop Greenwood’s Corporate Restructuring and Commercial Bankruptcy practice, click here. Contact Attorney David W. deBruin at 302-777-5353 or ddebruin@gawthrop.com.

Gawthrop Greenwood

Gawthrop Greenwood, PC has offices in West Chester, PA and Wilmington, DE serving clients throughout the greater mid-Atlantic region and nation. For more than a century, the firm has stood behind its core principle of providing high-quality legal services with personal attention. Gawthrop Greenwood’s diverse portfolio of clients comprises entrepreneurs, businesses, and governmental entities that entrust the firm with their representation in a wide range of matters including mergers and acquisitions, commercial litigation, estate and tax planning, land use and development, and domestic relations. A complete listing of the firm’s practice areas and attorneys, as well as a variety of legal resources, can be found at www.gawthrop.com.

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