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[1]. 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:
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[9].
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 info@starfieldsmith.com.
[1] See 11 USC § 101(51D).
[2] See 11 USC §1181(b).
[3] See 11 USC §1183.
[4] See 11 USC § 1188(a).
[5] See 11 USC § 1188(c).
[6] See 11 USC § 1185.
[7] See 11 USC §1191.
[8] See 11 USC §1191(c).
[9] See 11 USC §1190(3).
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