With the economy relatively strong and most small businesses doing pretty well, this may not seem like the most opportune time to be thinking of bankruptcy. But let’s face it: when the economy ultimately turns downwards, many small businesses are going to face financial hardship. And many of those may very well be forced into bankruptcy.
In the past the problem has been that getting a chance to reorganize under chapter 11 of the bankruptcy code has been too onerous and expensive a task for most of these small business owners. So much so that, according to this report in Lexology, of the 18,000 small business bankruptcy cases filed between 2008 and 2015, less than 27% resulted in confirmed plans of reorganization.
Now there’s relief. At the end of August, Donald Trump signed into law the Small Business Reorganization Act of 2019. The law will take effect on 19 February 2020 and it currently affects companies that have less than $2,725,625 in debts. What does it do?
For starters, the new law gives small business owners 90 days to file a reorganization plan, with easier rules for extending.
It no longer requires them to repay their debts in full in order to retain ownership of their companies, instead allowing those debts to be paid down using a new formula that projects disposable income over a period of three to five years. Business owners no longer have to assign “new values” to an equity interest; instead they only must ensure that they are not discriminating against their creditors and that their equity is “fair and equitable”.
The law now also requires the small business owner to appoint a “standing trustee” to oversee a bankruptcy case and no longer necessitates a “creditor committee” be formed that must vote on the plan or approve a disclosure document. This streamlines the process and saves costs. It also makes it harder for creditors to take away a business owner’s home and allows the courts to more quickly confirm a company’s reorganization plan. Payment of administration expenses are also allowed to be extended.
All of these rules are more debtor-friendly for the small business owner than in the past.
“The Small Business Reorganization Act of 2019 is probably the most extensive reform to the bankruptcy code since the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” legal experts from law firm Tucker Arensberg PC wrote for JD Supra. “It creates a mechanism that is more attractive and beneficial to small businesses, removing some of the main hindrances in a regular chapter 11 that prevent the small business from reorganizing.”
Many successful business owners I know have made mistakes, and some of those mistakes have been significant. But that doesn’t mean that it should cost them their companies. Rather than go out of business, being given a chance to reorganize could go a long way towards the survival of many firms and the people they employ. It gives leaders the chance to take a breath, work out debts with their creditors and make a plan for moving forward. Unfortunately, the laws have favored larger companies. Up until now.
Many experts in the profession are keeping a close eye on how successful this law is and are lobbying to expand its definition of small businesses to give more a chance.
