New Benefits for Those in Financial Difficulty: The Small Business Reorganization Act of 2019

If you own a small business (defined as one owing less than $2,725,625 in total debt) and are in or nearing financial difficulties, you should contact your attorney to learn more about The Small Business Reorganization Act of 2019 (the Act).

Effective in February 2020, this new addition to Chapter 11 of the U.S. Bankruptcy Code provides the benefits of a traditional Chapter 11 case, but with fewer burdens and more flexibility.

For instance:

• There will be no creditors’ committee to deal with (unless the court orders otherwise).
• A trustee will be appointed instead. This may be a mixed benefit.
  • On one hand, a good trustee might be able to help keep the case moving, negotiate a consensual plan of reorganization, object to claims, and take other burdens off the debtor.
  • On the other hand, a bad trustee might misuse his/her powers and make things worse for the debtor.
  • In either case, the debtor will pay the trustee on a percentage basis, generally under 5% of debtor’s quarterly revenues.
• A status conference must be held within 60 days after the commencement of the case to further a prompt and economical resolution of the various issues involved.
• No disclosure statement will be required, saving both time and attorney fees in the process.
• Only the debtor may file a plan; creditors may not.
• It is somewhat easier to “cram down” the terms of the plan on objecting creditors.
• The Absolute Priority Rule is essentially eliminated, making it easier for owners to retain their ownership in the debtor.
• Confirmation standards are relaxed, making it easier to get your reorganization approved.

Another beneficial feature is that proceeding under this new act is discretionary – debtors will be able to choose either to proceed under the Act or under the existing small business provisions of the code, whichever is in their own best interests.

This is a great step in the ongoing evolution of the Bankruptcy Code, making it easier and more efficient for small business debtors to reorganize their debts under the protections provided by federal law.

The new statute provides a bit of good news for creditors as well. For those of you who have been required to return a preferential transfer, you’ll be glad to know that

1. Preference claims up to $25,000 must be litigated where you are, not where the debtor is;
2. Debtors are required to use reasonable due diligence before making a preference demand, including a consideration of the party’s reasonably knowable affirmative defenses.

In other words, the practice of suing any creditor who received money from the debtor just to see what’s out there and then putting the creditor to the work of defending is at an end. The debtor is now tasked with doing its own homework – a change which the business community has long felt was overdue.

Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years.