President Donald Trump signed the Small Business Reorganization Act in the year 2019, August. Small business borrowers have remained to continue to scrap through reorganizing their companies, efficiently under Chapter 11 of the Bankruptcy Code. This law addresses some of the issues under the Code. The Act intends to bring about small changes in the ay bankruptcies are conducted making it cheaper and faster. Commonly, the Act is only applicable to business defaulters along with secured and unsecured debts of less than $2,725,625. The act includes the following provisions:
- “Appointment of a Trustee. The act provides for a trustee who shall facilitate the small business debtor’s reorganization and monitor the debtor’s consummation of its plan of reorganization.
- Streamlining the Reorganization Process.The act streamlines small business reorganizations and removes procedural burdens and costs associated with typical corporate reorganizations. Notably, only the debtor can propose a plan of reorganization. Small business debtors do not have to obtain approval of a separate disclosure statement or solicit votes to confirm a plan, and generally there are no unsecured creditors’ committees. The act also requires the debtor file its plan within 90 days of the bankruptcy filing.
- Elimination of the New Value Rule. The act removes the requirement that equity holders of the small business debtor provide “new value” to retain their equity interest in the debtor without paying creditors in full. For plan confirmation, the act instead only requires that the plan does not discriminate unfairly, is fair and equitable and, provides that all of the debtor’s projected disposable income will be applied to payments under the plan or the value of property to be distributed under the plan is not less than the projected disposable income of the debtor.
- Modification of Certain Residential Mortgages. Notably, the act removes the categorical prohibition against individual small business debtor’s modifying their residential mortgages. The act now allows a small business debtor to modify a mortgage secured by a residence if the underlying loan was not used to acquire the residence and was primarily used in connection with the debtor’s small business.
- Delayed Payment of Administrative Expense Claims. The act removes the requirement that the debtor pay administrative expense claims – including those claims incurred by the debtor for post-petition goods and services – on the effective date of the plan. Unlike a typical bankruptcy, a small business debtor may now stretch payment of administrative expense claims out over the term of the plan.
- Discharge Limitations. In many cases the court will grant the debtor a discharge after completion of all payments due within the first three years of the plan, or such longer period as the court may fix (not to exceed five years). The discharge relieves the debtor of personal liability for all debts provided under the plan except any debt: (1) on which the last payment is due after the first three years of the plan, or such other time as fixed by the court (not to exceed five years); or (2) that is otherwise non-dischargeable. All exceptions to discharge under the Bankruptcy Code apply to the small business debtor. This is a departure from a typical corporate Chapter 11 which has a more limited set of exceptions to discharge.”
The advantages of Chapter 11 reorganization have been obscuring to small business debtors knowing their size and inadequate monetary resources. In addition to this, you have the expensive obligations that one need to comply for a typical Chapter 11 bankruptcy. The act attempts to remedy many of these obstacles to successful small business reorganizations. If the Act demonstrates that it will be valuable to small business debtors, there might be a statutory or judicial push to improve and strengthen the debt constraints and make available better access to small businesses under the Act. Small businesses and lenders have a duty to be prepared and safeguard their interests under the new Small Business Reorganization Act.
- Reduced Expenses: “Reorganizing under Subchapter V should be less expensive for the debtor because certain administrative expenses that a small business would normally incur in a chapter 11 case have been eliminated. For example, the debtor in Subchapter V is no longer required to pay U.S. Trustee’s fees. 28 U.S.C. § 1930(a)(6)(A) (2019). Additionally, the requirement for the appointment of an official committee of unsecured creditors has been eliminated in Subchapter V. 11 U.S.C. §§ 1102(a)(3), 1181(b) (2019). Although appointment of a committee in a small business case may have been rare, at least there is no longer a need for the U.S. Trustee to solicit the formation of such a committee. Although a creditor’s committee is not mandatory, the U.S. Trustee or a creditor may file a motion requesting the appointment of a committee. § 1102(a)(3) and 1181(b).”
- The requirements for retaining debtor’s counsel have been modified to permit counsel to represent a debtor notwithstanding the existence of unpaid prepetition fees in an amount less than $10,000. 11 U.S.C. § 1195 (2019). On the one hand, this is an advantage in cases where the debtor does not have the luxury to delay the bankruptcy filing while accumulating cash in order to pay accrued attorney’s fees. On the other hand, the provision will be a negative to debtor’s counsel who loses the leverage of the disinterestedness provision under § 327(a) to require fees to be paid in full before filing a bankruptcy petition.
- Only Debtor can file a plan: Subchapter V does not authorize creditors or other interested parties to submit plans of reorganization. 11 U.S.C. § 1189(a) (2019). Another advantage is that the debtor does not have to prepare and file a separate disclosure statement along with the plan. 1181(b). Instead, new § 1190 requires the debtor to include in the plan a brief history of the business operations of the debtor, a liquidation analysis, and projections with respect to the ability of the debtor to make payments under the proposed plan. 11 U.S.C. § 1190(1) (2019).
Although there may be certain advantages for small businesses as mentioned under the Subchapter V, these businesses must also contemplate about the obligations they are obligated to perform under the Code.
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