Traditionally, businesses filed for Chapter 11 bankruptcy to reorganize during tough times. While Chapter 11 can give businesses a chance to get back on their feet, it doesn’t come without flaws. With expensive filing costs and crippling reporting burdens, small businesses aren’t always able to make it out on top. However, the Small Business Reorganization Act of 2019 (SBRA), could grant these entities a bankruptcy fast pass, allowing them to continue operations amid economic turbulence.
SBRA adds Chapter 5 option to bankruptcy code
The new statute aims to simplify the bankruptcy process by lowering costs and increasing efficiency. It shares the same concept as Chapter 11, but comes with some extra benefits. For instance, Chapter 5 bankruptcy provides a stay of proceedings if a business gets sued for an unpaid bill or receives an eviction notice. Chapter 5 also allows businesses to reduce their accounts payable and provides additional time for them to pay off their obligations. For some local shops, these added provision could mean the difference between riding out the pandemic and having to close their doors for good.
There is also no creditor committee with Chapter 5 bankruptcy. One of the major issues businesses can face when filing for Chapter 11 is that creditors typically must approve of a bankruptcy plan. In Chapter 5, however, if creditors don’t agree on a proposed plan, businesses and creditors can take their dispute to bankruptcy court. Then, a judge can help formulate an approved plan.
What do I need to file for Chapter 5 bankruptcy?
Businesses that qualify for Chapter 5 are those with total secured and unsecured debts of $2,725,625.00 or less, excluding debt owed to affiliates or insiders (the single asset real estate entity is specifically excluded from the new subchapter). Under the federal CARES Act associated with the COVID-19 pandemic, the debt limit has been temporarily increased to $7.5 million.
For a successful filing, a business will likely need:
· Their most recent balance sheet
· Their statement of operations
· Their cash flow statement
· Their federal income tax return (or a sworn statement that the document doesn’t exist)
If businesses want to get this plan approved, they must do so within 90 days. However, much of that work may require legal assistance.
New provisions provide hope for small businesses
The recent pandemic is uprooting local business operations. Sadly, not every entity is equipped to handle these sudden changes. If you’re a small business owner and struggling to get by, a bankruptcy attorney can help you get the relief you need. And if you run a local food service or hospitality company, our firm is now part of the Restaurant and Lodging Association of Michigan, ready to stand by you when you need it most.