Small Business Reorganizations Under Subchapter V are Now Available to More Distressed Companies & Individuals

Most are familiar with the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which provide emergency and in some cases forgivable SBA loans to individuals and small businesses, payroll tax relief, and other related relief. However, one provision which provides a potentially powerful tool to small businesses and individuals engaged in business has not gained as much attention in the mainstream media. Specifically, the CARES Act opens the door to potentially thousands of businesses and individuals to allow them to take advantage of the Small Business Reorganization Act of 2019 (SBRA), which created the “Subchapter V” bankruptcy case. The SBRA which passed in late 2019, but which only took effect on February 19, 2020, is an attempt to make Chapter 11 reorganizations more efficient, streamlined, and less expensive than traditional Chapter 11 reorganizations. The concept behind the SBRA was to make Chapter 11 accessible to those companies and individuals who could restructure a salvageable enterprise were it not for the heavy administrative burden of Chapter 11. A high-level discussion of the provisions of the SBRA are discussed below.

Prior to the enactment of the CARES Act, a company or an individual engaged in commercial or business activities and had less than $2,725,625 in total non-contingent liquidated debt, including secured and unsecured claims, could elect to file under Subchapter V of Chapter 11. In response to the anticipated economic hardship that will befall many small businesses as a result of the COVID-19 pandemic, that debt limit has been raised to $7,500,000 for the next year. Cases filed after March 27, 2021, will be subject to the $2,725,625 debt limit. This significant raise in the debt limit should provide distressed companies with a very effective tool to help address the damage caused or exacerbated by the pandemic.

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