Until recently, Chapter 11 bankruptcy cases for small business debtors were lengthy and cost prohibitive. Congress aimed to change that through the passing of the Small Business Reorganization Act (the “Act”) Pub.L. 116-54, which was signed into law on August 23, 2019. The Act goes into effect 180 days from the date it was signed.
The Act adds a new Subchapter V to Chapter 11 of the United States Bankruptcy Code, which pertains to businesses debtors who have secured and unsecured debts that do not exceed $2,566,050.00. This limit is particularly relevant to SBA loans, as SBA borrowers will likely often fit into the definition of a “small business debtor” under the Act.
The Act is designed to streamline the Chapter 11 bankruptcy process for a small business debtor while condensing the time in which the plan must be filed, and doing away with some requirements that add cost to a traditional Chapter 11 bankruptcy case. Some of the provisions of the Act are as follows:
- The Act generally removes the requirement for a creditors committee and appoints a standing trustee for the small business debtor’s bankruptcy estate, who shall facilitate the reorganization and monitor the debtor’s consummation of the reorganization plan.
- No later than 60 days after the bankruptcy filing, a status conference shall be held by the court. The debtor is required to file a status report at least 14 days prior to the status conference which details the steps taken or to be taken to effectuate the reorganization.
- Only the debtor may file the plan of reorganization, which plan must be filed within 90 days from the date the bankruptcy case was filed, unless otherwise extended by the court. The Act removes the requirement that a disclosure statement be filed and approved prior to solicitation of plan approval.
- The Act requires that and requires that a plan be “fair and equitable” to be approved. For a plan to be “fair and equitable” it must provide that all of the debtor’s projected disposable income will be applied to payments under the plan, or that the value of the property distributed under the plan not be less than the projected disposable income of the debtor.
One of the most important provisions of the Act that impacts SBA lenders pertains to the requirements of the contents of the plan. Under traditional chapter 11 cases, a debtor could not modify a residential mortgage securing a business debt. The Act specifically removes that exemption and permits a small business debtor to modify a debt held by a lender that is secured “only” by a mortgage on their principal residence if the loan was not used to purchase that property, and the debt was primarily a business loan.
The interpretation of this provision of the Act is unclear. Because the interpretation of the Act has not yet been tested in court, it is uncertain whether residential collateral mortgages may be altered if they are the “only” collateral for a business loan, or if the mortgage “only” secures a business loan. Many practitioners are interpreting this provision as applying to mortgages that “only” secure business loans. If this line of reasoning holds, SBA loans could potentially become subject to the Act’s exception and could result in debtors modifying the terms of their residential collateral mortgages through their bankruptcy plan.
We will be monitoring the impact of the Act on small business debtors once the Act goes into effect to determine how the bankruptcy courts implement these provisions. For more information regarding SBA servicing, liquidation and workouts contact the attorneys at Starfield & Smith, P.C. at 215.542.7070 or email us at firstname.lastname@example.org.
 See 11 USC § 101(51D).
 See 11 USC §1181(b).
 See 11 USC §1183.
 See 11 USC § 1188(a).
 See 11 USC § 1188(c).
 See 11 USC § 1185.
 See 11 USC §1191.
 See 11 USC §1191(c).
 See 11 USC §1190(3).