On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (CARES Act), providing more than $2 Trillion in economic stimulus to individuals and small businesses. In addition to the unprecedented financial aid through loans and other assistance, the CARES Act expanded eligibility for small businesses to qualify for relief under the Small Business Reorganization Act of 2019.
The Small Business Reorganization Act of 2019 (SBRA) went into effect on February 19, 2020, and was designed to benefit small businesses by making Chapter 11 reorganization quicker and less expensive. However, only small businesses with non-contingent liquidated secured and unsecured debt of $2,725,625 or less were eligible to elect to proceed as a small business case in Chapter 11. The CARES Act amends the SBRA to increase that eligibility threshold to $7,500,000 for a period of one year, returning to the original limits on March 28, 2021.
The SBRA streamlines the current Chapter 11 process, expediting the process and reducing the expense of bankruptcy, thereby increasing the potential for small businesses to successfully reorganize. In a small business case under the SBRA, no unsecured creditors committee is appointed, no disclosure statement is required, no quarterly United States Trustee fees are paid, and only the small business debtor may file a plan. Similar to cases under Chapter 12 (Family Farmers or Fishermen) or Chapter 13 (Individual Reorganization), in small business cases a trustee is appointed to monitor the case and to facilitate a Plan, but as in traditional Chapter 11 cases, the debtor remains in possession of its assets and controls the business. Small business reorganization plans are funded from all disposable income of the Debtor, which includes all income not reasonably necessary for payment of expenditures necessary for the continuation, preservation or operation of the debtor’s business. But by eliminating certain provisions applicable to traditional, non-small business Chapter 11 cases, small business owners have an increased chance of confirming a plan and retaining their ownership interests.
The CARES Act’s expanded debt threshold for eligibility will allow greater numbers of qualifying small businesses impacted by COVID-19 to utilize the small business Chapter 11 process to restructure their debts, remain in business and survive these unprecedented times.