On Friday August 23, 2019, President Trump signed the Small Business Reorganization Act of 2019 into law, which includes a new small business chapter 11 bankruptcy. This law will go into effect in February of 2020 and could benefit many small business debtors who are considering filing a chapter 11 bankruptcy next year. I discussed this topic on the New Urban Unlimited Radio show on 1150am KKNW and you can listen to the segment about the new small business chapter 11 bankruptcy here:
How Does the New Small Business Reorganization Act of 2019 Help Small Business Owners?
If you are a struggling small business owner, this new law may have no affect on your debt relief options. For many struggling small business owners, the best option may be to close the business and then file a personal chapter 7 or chapter 13 bankruptcy or consider debt settlement options.
In chapter 7 bankruptcy a debtor allows for a debtor to receive a discharge of most debts, and they are allowed to keep a limited amount of exempt (protected) assets. Non exempt assets may be subject to an appointed trustee liquidating the assets on behalf of creditors. A debtor in chapter 7 may also be subjected to income limits and you can’t have disposable income remaining to pay creditors and still file a chapter 7.
In a chapter 13 bankruptcy no assets are liquidated and sold, but you do have to pay back the value of any non exempt assets in addition to any disposable income you may have. The catch here is there are debt limits in chapter 13 which are currently $1,257,850 in secured debt (tied to property) and $419,725 in unsecured debt (credit cards, personal loans, medical bills etc). You will not be eligible for chapter 13 if you exceed these debt limits.
There is also the standard chapter 11 bankruptcy in which there is no debt limit and debtors can propose a repayment plan, however standard chapter 11 bankruptcies can be very expensive and time consuming requiring monthly reports, creditor committees, trustee’s are usually not appointed to manage payments which means you are in charge, and cram downs are not likely available (cramming the debt owed on an asset down to the actual value of the asset).
The new streamlined small business chapter 11 bankruptcy will allow for a trustee to be appointed to the case to manage payments, there will be no creditor committees, no monthly reports and cram downs may be available. In general, the new streamlined chapter 11 bankruptcy will be treated much like a chapter 13 bankruptcy in which a debtor will only have to pay whatever disposable income they have available to creditors that is fair and equitable.
Who Can Qualify for the New Small Business Chapter 11 Bankruptcy?
The new chapter 11 small business bankruptcy will be available to:
(1) Small businesses or debtors who have a total debt of less than $2,725,625. This number may be inflation adjusted every three years.
(2) The debtor must be engaged in commercial or business activities other than a single asset-real estate debtor.
(3) At least 50 Percent of the liabilities arose from commercial or business activities.
(4) The debtor is not a member of an affiliated group of debtors (Corporate organization) who’s debts together exceed the statutory threshold.
How Does the New Small Business Chapter 11 Bankruptcy Work?
When a small business bankruptcy is filed under chapter 11, a trustee will be appointed to the case much like in chapter 7 or chapter 13 bankruptcy. The role of the trustee will be to collect payments on behalf of creditors and distribute the funds much like in a chapter 13 case. The small business chapter 11 trustee will also monitor the debtor’s plan of reorganization and could object to a plan if it is not fair and equitable to creditors as proposed.
The debtor in a small business chapter 11 bankruptcy will be required to have a status conference within 60 days of filing the chapter 11 petition, file a report no later than 14 days before the first status conference, and file a plan within 90 days that is fair and equitable in which all projected disposable income of the debtor will be paid to a chapter 11 trustee.
A small business chapter 11 plan can last 3-5 years and at the completion of the plan and a discharge should be given to the debtor, forgiving all remaining unsecured debts per the court order.
Why Should a Small Business or High Net Worth Debtor Consider Chapter 11 Bankruptcy?
The new law makes small business chapter 11 bankruptcies faster and less expensive by creating a new subchapter of Chapter 11 of the bankruptcy code specific to small businesses. In the past chapter 11 bankruptcy did not make sense for most small business debtors because of the expense and requirements of a normal chapter 11 bankruptcy case.
The new small business chapter 11 bankruptcy makes the most sense for debtors who have debts above the allowed chapter 13 debt limits, do not qualify for chapter 7 bankruptcy, or may lose an asset that they want to retain if they were to file a chapter 7 bankruptcy. This new plan may be the perfect solution to those who want to file chapter 13 but are over the debt limits due to various business ventures.
As an added benefit to the small business chapter 11 bankruptcy, a small business debtor may cramdown and/or modify a mortgage claim if in course of operating a business the debtor obtained a secured mortgage loan on their primary residence. The mortgage loan must not have been used to primarily to purchase the debtor’s residence, and the loan funds were used in connection with the debtor’s small business. This is a useful tool to change the terms of home equity loans and second mortgages obtained by the debtor for business purposes.
If you are a small business owner struggling to figure out your next move and you live in Washington State, give Symmes Law Group a call at 206-682-7975 or contact us to speak to a bankruptcy attorney and learn about your options.