The Coronavirus Aid, Relief & Economic Security (CARES Act), passed by Congress on March 27, 2020, makes several important revisions to the federal Bankruptcy Code.  The most substantial change is that the option to file for bankruptcy under the new Small Business Reorganization Act, a lower-cost option, has become available for many more small businesses. 

The SBRA, which became effective in February 2020, added a subchapter (5) to the Bankruptcy Code’s Chapter 11, which is commonly used for businesses to reorganize.  This option reduces the time and cost of reorganization for small businesses with debts of $2,725,625 or less. The new CARES Act increases that debt limit to $7.5 million, which means many more small businesses will qualify for this option.

Subchapter 5 also includes these advantages for small businesses:

• Only the
  debtor can file a reorganization plan. This eliminates the time and expense of
  negotiating over competing plans filed by creditors.
• No vote on
  the reorganization plan is required. Creditors can still object to the plan,
  but the debtor does not need to solicit creditor acceptances.
• No
  creditors’ committees, unless required by the bankruptcy judge. This provision
  aims to speed up the reorganization process.

A plan under Subchapter 5 will also be confirmed provided the business contributes all disposable income for 3-5 years to make its plan payments.

The higher debt limit for qualification under Subchapter 5 applies only to cases filed after the enactment of the CARES Act and is valid for one year after the act became effective (end of March 2021).  At that time, the debt limit will be reduced to $2,725,625 unless extended by Congress. 

Debtors considering bankruptcy relief should examine their situations to determine if the CARES Act changes identified above make bankruptcy under the SBRA a viable option to consider.

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Neil D. Schor is a lawyer with Harrington, Hoppe & Mitchell. His practice areas include bankruptcy, public sector law, civil litigation and commercial law. He can be reached at nschor@hhmlaw.com or at (330) 744-1111.