Set Your Clocks for 12:01am: Happy New Bankruptcy Act!

How are you celebrating Small Business Reorganization Act of 2019 Eve?

In case you’re wondering what I’m talking about, at 12:01am, the Small Business Reorganization Act of 2019 takes effect tonight.

So, if you wake up tomorrow morning and there have been a hundred or more small business and individual Chapter 11 bankruptcy cases filed overnight, this is why.

It’s because the debtors’ counsel think the new Act provides some tactical advantage for their small chapter 11 case. (And, disclaimer: by “small,” it’s a case where total debts is less than $2,725,625.)

Once upon a time, Chapter 11 was meant to be used for big cases–think K-Mart, Sears, Enron, American Airlines. Then, about 10 years ago, we started seeing more individuals and smaller “mom and pop” businesses filing bankruptcy.

Part of the reason was that these cases were “too big” for a Chapter 13. So, they got shoe-horned into an overly complex Chapter 11 case. It’s been generally a bad fit for many debtors.

In a way, the new Act makes a small chapter 11 case resemble a “big” chapter 13 case. Here’s how:

The process is accelerated, and the debtor must submit a plan within 90 days of the case being filed. Plus, the changes shave down some of the administrative requirements in a typical chapter 11, like the appointment of a creditors’ committee and the need to file a disclosure statement.

Also, there is now a “Sub-Chapter V” Trustee appointed in a case, who will oversee and, in some situations, manage the progress and implementation of a repayment plan.

Also, in the most Chapter 13 model possible, the discharge will not be granted until the debtor completes all payments due within the first three years of the plan or a longer period not to exceed five years (depending on the plan terms).

Finally, the part that gets all the attention is the elimination of the “absolute priority rule,” which requires a business owner to pay “new value” in order to retain any interest in a business unless creditors are paid in full. It used to be that creditors could object and require the debtor pay new money in order to keep a business, and, if none is paid, the creditors had to be paid in full. This is now gone.

So, if you wake up tomorrow morning and you see a lot of new Bankruptcy Cases, you may wonder why the debtor’s law firm stayed up so late to file it.

This is why.

But, creditors, please know this–there’s nothing really to do to stop or prevent this new Act’s application. Just wake up tomorrow and re-read the Act. And, be sure to re-read Chapter 13 while you’re at it.

Author: David

I am a creditors rights and commercial litigation attorney with Harris Shelton in Nashville, Tennessee.

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