Small Business, The Coronavirus & Chapter 11 Bankruptcy

There are a lot of unknowns about the coronavirus (COVID-19), including what kind of economic destruction it will leave in its wake. Small businesses will undoubtedly feel the effects of this global pandemic. While some small businesses will manage to pull through, others will be forced to consider other options, such as bankruptcy.

Until recently, small business owners really only had two bankruptcy options: Chapter 7 and Chapter 13.

While most people think Chapter 7 is for individuals, businesses can file Chapter 7 if an attorney files it for them, but the business will be shut down.

Chapter 13 allows a small business owner to retain the company and pay back their debt through a payment plan.

So what’s left? Chapter 11 bankruptcy. Simply put, Chapter 11 allows an individual or company time to come up with a plan to reorganize their finances so they can pay back their debts. Chapter 11 is the most complex and expensive of the three bankruptcies, and under Chapter 11 creditors decide whether to accept a company’s reorganization plan.

Most small businesses have not found success filing Chapter 11.

Until now…

Chapter 11 Becomes a Viable Option for Small Businesses  

The Small Business Reorganization Act of 2019 (SBRA) puts this debt relief option in reach for small business owners. In fact, the SBRA took effect just last month, February 2020.

The SBRA streamlines the rules that oversee a small business’ attempt to reorganize under Chapter 11.

Here are some of the major changes that benefit small businesses filing for Chapter 11:

• Only the small business owner can file a reorganization plan. The SBRA gets rid of a rule that let creditors file a reorganization plan that competes against the small business’ plan. Now, only the debtor can file a reorganization plan.
• A disclosure statement is not necessary. A small business reorganization plan does not have to come with a lengthy description of the plan.The plan, though, must be fair and equitable and not unfairly discriminate.
• It’s harder for creditors to “vote no” on small business filings. Small business owners filing for Chapter 11 do not have to drum up votes from creditors to confirm their reorganization plan, unless a court orders an unsecured creditors committee.
• The absolute priority rule is thrown out. Until now, under Chapter 11 reorganization, if a small business could not completely pay back its creditors, then the absolute priority rule kicked in. It prevented the small business from keeping its interest under the reorganization plan unless it could contribute considerable “new value” to the company’s new plan.The SBRA lets small business owners keep their equity interest in the company, but it requires the business owner’s disposable income be put toward the debt payments.

If you have questions about how Chapter 11 may benefit your small business, feel free to reach out. We hope your business endures during this unprecedented time, but if it faces hardship, we’re here for you. Call 303-688-0944 or schedule online some time to talk with one of our debt relief attorneys.