CARES Act Expands Availability of Chapter 11 Relief to More Small Businesses
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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law to help mitigate some of the economic effects of the ongoing COVID-19 pandemic. Even after the passage of the CARES Act, many small businesses may not have enough resources to meet basic operational obligations such as rent, utilities, payroll, and other necessities.
03.30.20
By increasing the debt ceiling for troubled companies seeking to reorganize from $2,725,625 to $7,500,000, the CARES Act makes it easier, faster—and potentially far less expensive—for more small businesses to reorganize under Chapter 11 of the Bankruptcy Code.
Prior to the enactment of the Small Business Reorganization Act (SBRA)—which only became effective in February of 2020—troubled small businesses often avoided filing for protection under the Bankruptcy Code, as it was typically believed to be far too difficult, expensive, and prolonged of a process. The SBRA was enacted to address some of these concerns by creating a more pragmatic means by which small businesses could reorganize. Unlike a traditional Chapter 11 case, a Subchapter V proceeding should be:
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- Fast: Plans of reorganization must be filed within 90 days, subject to approved extensions.
- Direct: Creditors may not file competing plans of reorganization.
- Efficient: The fees typically associated with the appointment of a creditor’s committee and oversight by the Office of the United States Trustee are eliminated in most cases.
- Practical: The debtor will be permitted to repay obligations over a period of three to five years, so long as all available disposable income is committed to plan payments.
- Reasonable: Small business owners will be able to retain their equity interests without meeting the requirements typically associated with the absolute priority rule.
By increasing the debt ceiling for troubled companies under Subchapter V by almost $5 million the CARES Act will give more small businesses an opportunity to reorganize their affairs. The new debt ceiling established by the CARES Act will expire one year from the date of its enactment, absent an extension by Congress.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Author Corinne Brennan is a partner in the Bankruptcy & Restructuring Department at Klehr Harrison.