Chapter 11 was once a favored way to reorganize a small business. However, over the last 40 years, the trend toward higher costs and more complicated procedural hurdles have made Chapter 11 undesirable or unsustainable for a certain segment of businesses.
In an effort to make Chapter 11 relevant again for those parties, the Small Business Reorganization Act (Senate Bill 3689 and H.R. 7190) was introduced late last year, but almost six months have passed without much action concerning the pending bill. In April 2019, members of the Senate Judiciary Committee reintroduced the bill and this newly proposed version is not likely to be shelved anytime soon. A bi-partisan group of senators introduced and support the act (including Chuck Grassley, Sheldon Whitehouse, Thom Tillis, Amy Klobuchar, Joni Ernst and Richard Blumenthal). Many savvy legislative watchers expect this bill to pass before the end of the year. This means that the provisions of the proposed SBRA, which would add a new subchapter to Chapter 11 of the Bankruptcy Code, will have the potential to change the trajectory for many troubled businesses throughout the country – likely for the better.
Although billion-dollar bankruptcy cases like the Sears, iHeart Media and PG&E grab all the headlines, the majority of commercial bankruptcy cases filed in the United States actually concern debtors with less than $2.1 million in assets (according to 2017 statistics). In the initial version of the SBRA, the act contemplated dollar limits that would only apply to businesses with liabilities under $2.56 million (excluding debt owed to insiders and affiliates). However, this limitation is expected to increase to at least $5 million (and potentially as high as $10 million) in the most recent version of the act. If this liability limitation is increased, the SBRA would apply to a greater number of potential business cases, and Chapter 11 could once again be a legitimate option for a smaller company to address its insolvency concerns.
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