Chapter 11 of the US Bankruptcy Code provides a mechanism for financially troubled businesses to reorganize their financial and business affairs. Nonetheless, chapter 11 has long been criticized as too expensive, complicated, and time-consuming for small businesses. As a practical matter, reorganization under chapter 11 has been beyond the reach of many small businesses, who have been forced to liquidate instead.
In 2019, Congress enacted the Small Business Reorganization Act (“SBRA”) with the aim of making it faster, cheaper, and easier for small businesses to restructure their finances and enhance their prospects of survival. The SBRA is among the most debtor-friendly amendments to the Bankruptcy Code since the current Code was enacted in the 1970’s. The ability to use the streamlined, accelerated reorganization provisions of the SBRA was limited, however, to companies (or in some cases individuals) with debt of no more than $2,725,625.
Fortuitously, the SBRA went into effect on February 19, 2020, just as the Covid-19 pandemic hit the US economy. In response to the economic disruptions caused by the pandemic, Congress enacted the CARES Act on March 27, 2020. Among its provisions, the CARES Act substantially increased the eligibility limit for small businesses looking to use the SBRA's debtor-friendly provisions to $7,500,000. Doubtless anticipating a quick end to the pandemic, the CARES Act provided that the increased eligibility limit would revert to $2,725,625 after one year, i.e. on March 27, 2021.
With the rollout of vaccines, there is now a (dim) light at the end of the pandemic tunnel. While pandemic-induced challenges continue to confront a multitude of small businesses, as the country gradually opens back up, small businesses damaged by Covid may now finally have the ability to project future profits, file a feasible plan, and thus benefit from a reorganization utilizing the SBRA
On December 27, 2020, Congress enacted the Consolidated Appropriations Act of 2021 (CAA), which provided an additional $900 billion in pandemic relief funding and made a number of temporary amendments to the Bankruptcy Code to assist businesses forced to seek bankruptcy relief. The CAA was an ideal opportunity for Congress to extend the enhanced SBRA debt limit of $7,500,000 beyond its current March 27, 2021 sunset.
Congress failed to include an extension of the expanded SBRA debt limit in the CAA. Nonetheless, on February 25, 2021, Senate Democratic Whip Dick Durbin (D-IL), Chair of the Senate Judiciary Committee, and Senator Chuck Grassley (R-IA), Ranking Member of the Senate Judiciary Committee, introduced the bipartisan COVID-19 Bankruptcy Relief Extension Act (Extension Act), which would, among numerous other extensions of the temporary amendments to the Bankruptcy Code under the CARES Act and the CAA, extend the $7,500,000 debt limit under the SBRA for an additional year, to March 27, 2022. Stay tuned!
Businesses and business owners contemplating a possible reorganization under the SBRA must be mindful that if the Extension Act does not quickly become law, then on March 27, 2021, the SBRA debt limit will revert from $7,500,000 to $2,725,625, and many companies currently eligible for relief under the SBRA will no longer qualify.
The bankruptcy group at Hirschler is ready and able to advise companies and business owners on the benefits (and burdens) of proceedings under the SBRA as well as under the other reorganization and liquidation provisions of the Bankruptcy Code.
Stephanie A. Hood