As the Coronavirus continues its course, it has proven to be a drag on our communities, our country, and our jobs and businesses. For the small business owner, the dollars from the Paycheck Protection Program (PPP) have come and gone, payrolls have been cut, and the struggle to find footing in the new normal continues. For some businesses, it may be time to call it quits. But for others, a bright future is ahead if the company can dispose of the debts that are holding it back.
That’s where the new small business bankruptcy reorganization law can help. For small businesses, bankruptcy is meant to hold off creditors for a time so that the business can work out realistic payment plans and discounts, reorganize itself, and start forward again. Unfortunately, in the past, bankruptcy has been too complicated and too expensive for most small businesses to benefit.
The Small Business Reorganization Act aims at making bankruptcy reorganization a much better option for businesses that want to keep going. It benefits any business with less than $2,725,625 in debt. (Until March 27, 2021, the debt limit has been raised to $7.5 million.)
What about this new law makes it a better option than in the past?
Control. Previously, a small business owner who filed bankruptcy had to turn over control of the bankruptcy process to his or her creditors or to the trustee. Bankruptcy reorganizations became unpalatable except in situations where new ownership was coming in after the bankruptcy. The old law only allowed the business owner to maintain possession when all debts were paid in full, and it gave creditors too little incentive to reach agreement with the owner that they had come to distrust.
With the new law, however, the business owner retains ownership and control over the company during the process. The law allows 90 days to develop and propose a reorganization plan – and no one else besides the business owner can propose such a plan. The owner has the ability to maintain the initiative throughout the process. The business need not pay back everything to keep operating. Instead, it only needs to put forth a plan that distributes all of its disposable income over the next 3 to 5 years to creditors. Disposable income is income not needed for operation, preservation, or maintenance of the company’s business. And creditors don’t have to like such a plan. So long as the plan includes full repayment of debt secured by collateral, the court will approve it regardless of whether any creditor opposes it. The business owner may maintain his or her interest in the company so long as the plan does not discriminate unfairly and is fair and equitable to creditors who do not vote in favor of the plan.
Efficiency. The new law streamlines the process. The proposed plan doesn’t have to be nearly as detailed as it was previously. Since a creditor’s opposition to the plan is not as critical as in the past, far less effort needs to be made to address that opposition. Many requirements of the past law have either been eliminated or condensed. For example, in most cases, there will be no need for a creditors’ committee. A creditors’ committee added tremendous expense to the process because of the fees of the attorneys and other professionals. Those fees were paid from the assets of the company. It also added delay as the committee had to accommodate everyone’s calendars and pore over the details of the filings. The debtor is not required to pay quarterly fees to the U.S. Trustee, and the administrative costs of the bankruptcy can be paid over the term of the plan. Finally, under the old law, an attorney who represented the company before bankruptcy would not be able to represent the company in bankruptcy if any fees were owed at the time of filing. Instead, to be paid, the lawyer would have to refer the case to another lawyer and become a creditor of his former client. Under the new law, however, the debtor company may keep its lawyer so long as the unpaid fees are less than $10,000. This change reduces costs by enabling the company to use a lawyer with knowledge of its business.
The new law can be a valuable tool for small businesses seeking to reorganize as they find their way through the Coronavirus world, primarily because of the improved control and the efficiency of the process.