Congress has enacted and on Friday, August 23, 2019 the President signed a bill which will add a new subchapter V to Chapter 11 of the United States Bankruptcy Code designed to streamline the reorganization process for small businesses. This new law follows some unsuccessful stories about small businesses being unable to successfully reorganize under the existing Chapter 11 rules which have been in effect for decades. In prior revisions to the Code, Congress added several provisions, most notably to Chapter 11 with the underlying goal of providing a pathway for small businesses to reorganize more smoothly. Debtors and courts have struggled with the refined rules and this latest Act is an attempt to smooth out the wrinkles.
A small business debtor is defined in the Bankruptcy Code as a person engaged in commercial or business activities, excluding a person whose primary activity is owning or operating real estate that has an aggregate of not more than $2,725,625 of secured and unsecured debt at the time of filing of the petition for relief. Person includes a natural person, a partnership and a corporation. Some of the more notable provisions contained in the new act include, (i) only the debtor may file a plan of reorganization, (ii) the plan must be filed within 90 days of the filing of the petition, (iii) there is no longer a requirement that the debtor draft and have approved a disclosure statement, nor is the debtor required to solicit votes in favor of its plan, and (iv) a standing trustee will be appointed to oversee the reorganization, where historically, in a traditional Chapter 11 case, counsel from the office of the United States Trustee would oversee the reorganization process.
Two very important practical features included in the Act are first, that it removes the requirement of new value where a debtor intends to retain its equity interest without paying the creditors 100% of their claim. While the so-called “new value rule” is too comprehensive a topic to cover here, suffice to say, that its requirement in the prior version of the Code, prevented many small business debtors from effectively reorganizing as the new value requirement was difficult to overcome in most cases. Subsection V will allow debtors to retain their equity so long as the plan does not discriminate unfairly, is fair and equitable and all of the debtor’s projected disposable income will be used for payments under the plan. Additionally, and perhaps most importantly, the prohibition against modifying mortgage debt on one’s principal residence is lifted and will now parallel the provision that existed under Chapter 12 for the family farmer. Theoretically, a debtor will be able to modify his mortgage in certain circumstances and reduce the interest rate, extend the term and even recast the principal amount due at current values. Prior to the Act, a debtor was unable to do this in Chapter 7, 11 or 13 on a principal residence.
The Act will take effect on February 22, 2020. Small businesses, lenders and creditors may be impacted by this new law and should be prepared. Attorneys at Baker, Braverman & Barbadoro, P.C. will be ready to assist any party that finds itself involved in this new bankruptcy proceeding. – Gary M. Hogan.
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