CHANGES TO THE BANKRUPTCY CODE PROVIDES TIMELY RELIEF TO SMALL BUSINESSES
Small businesses are the driver behind the Hudson Valley economy, but many are struggling to survive during the current Covid-19 pandemic. A recent US Chamber of Commerce poll showed that half of small businesses only have enough cash on hand to survive for one month without income, while approximately 40% of small businesses feared that they will have to file for bankruptcy protection in the coming months.
For many, assistance may come from recent changes to Chapter 11 of the Bankruptcy Code, which makes it easier for businesses to reorganize their debts while retaining operational control and ownership of the assets needed to function. The Small Business Reorganization Act (SBRA), enacted last summer and which went into effect in February of this year, made modifications to Subchapter V of Chapter 11, to assist small business owners who had a viable business long term, but that needed assistance dealing with short term financial hurdles.
The most significant change is that whereas previously business owners faced the real possibility of losing control of the assets and operations of their businesses, under the new law, trustees do not automatically take control of running the business from the owner. Provided the business owner is able to show viability as a going enterprise, the trustee will work with the business owner to establish a payment plan that can last from 3-5 years. During that period, the disposable income of the business is paid towards the businesses creditors. At the end of the payment plan, the debts covered by the bankruptcy plan are then discharged, provided all of the terms of the plan have been met.
Another change from the prior law is that payment plans no longer need the approval of creditors to be accepted by the bankruptcy court. This was previously a substantial hurdle to business owners looking to file a Chapter 11 reorganization, as many creditors were unwilling to negotiate knowing they had leverage over the business owner.
A further important change provides that business debts secured against the personal residence of a business owner may now be modified under subchapter V payment plans, provided the debt was not primarily used to purchase the residence. Previously, debts secured against a residence could not be modified, meaning a business owner facing hard times may also have to face the loss of their home as well as their livelihoods.
Ordinarily, only small businesses with under $2.7 million in debt could file for reorganization under subchapter V. That amount was raised in the CARES Act to $7.5million for cases filed within a year of the Act coming into effect on March 27, 2020. This is likely to cover the vast majority of businesses seeking bankruptcy protection as a result of the current lock-down orders.
No-one truly knows when the current crisis will abate, or what long-term effect it will have on the economy. In many cases though, the recent changes to Chapter 11 bankruptcies now provide business owners with a path through financial difficulties rather than a dead-end. Speak with a bankruptcy attorney at Jacobowitz & Gubits, LLP. today about the options you have to help your business survive and ultimately thrive in the new normal.
This is not intended to be legal advice. You should contact an attorney for advice regarding your specific situation.