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How the Small Business Reorganization Act could change bankruptcy

This spring, Congress reintroduced a bill that would provide small businesses with greater opportunities to benefit from Chapter 11 bankruptcy. The Small Business Reorganization Act (SBRA), if passed, will add a Subchapter V to the United States Bankruptcy Code. New provisions propose giving businesses with less than $2,566,050 in liabilities a more streamlined method of debt relief.

Here are the highlights for small business owners present in the proposed law:

Restructuring at a reduced cost

The crux of the proposed SBRA is streamlining the usual timeline of Chapter 11 bankruptcy to reduce costs for small businesses. The SBRA proposes requiring companies filing for Chapter 11 to file their reorganization plan within 90 days of commencing bankruptcy proceedings. A trustee appointed by the small business would oversee the case to ensure reorganization stayed on track.

Plus, the proposed legislation removes requirements for a committee of unsecured creditors and a disclosure statement. All of this, according to the Senate Judiciary Committee, would help to reduce costs.

Preserve ownership interest

The SBRA also aims to modify the Bankruptcy Code by allowing small business owners to retain their stake in the company during bankruptcy. So long as their reorganization plan does not discriminate against certain creditors, their ownership interest remains intact. Management can continue operating the business unless the court finds cause for removing them, such as:

  • Fraud
  • Dishonesty
  • Incompetence
  • Gross mismanagement

Previously, benefits like those offered by the SBRA were only available to larger companies. If enacted, this legislation could drastically improve the Chapter 11 process for small businesses.

In many cases, filing for bankruptcy should be a last resort. However, with new tools at your disposal, filing for Chapter 11 may become a more attractive option under the SBRA.

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