Temporary and Permanent Changes Made to the New Small Business Reorganization Act of 2019 as a Result of the Coronavirus Aid, Relief, and Economic Security Act Enacted March 27

On August 23, 2019, President Donald Trump signed into law the Small Business Reorganization Act of 2019 (SBR Act), which became effective last month. On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 global pandemic. New subchapter V under chapter 11 of the US Bankruptcy Code eliminates some of the more costly elements of traditional chapter 11 relief, such as disclosure statements, and in some ways is modeled after expedited procedures used in chapter 12 and 13 cases. Subchapter V was designed to promote simplicity and efficiency for reorganization of small-business debtors. The CARES Act temporarily raises the eligibility debt ceiling from $2,725,625 to $7,500,000 for new cases filed between March 28, 2020, and March 27, 2021. A permanent change to the SBR Act made by the CARES Act is the elimination of eligibility to file for subchapter V relief for any affiliate of a public company.

Unchanged highlights of new subchapter V include the following:

The SBR Act leaves some issues unanswered. For example, it is unclear what interest rate applies to secured loans under confirmed plans. Will it be the contract rate or some presumptive rate established by local rule, as is the case with chapter 13 cases in many jurisdictions? It is also unclear how courts will apply prior chapter 12 and chapter 13 precedents to new subchapter V cases.

The SBR Act could impact many lenders. It may result in more filings by debtors who cannot afford the traditional chapter 11 process. Debtors will be able to more easily obtain confirmation of plans over creditor dissent and to cram lenders down on the value of residential collateral used for business loans. At the same time, it should generally be a faster process that overall may reduce costs for creditors and provide greater chances of repayment due to the involvement of a trustee.

Due to the economic conditions caused by the global pandemic and the temporarily heightened debt limits under the CARES Act, increased bankruptcy filings are likely in the coming months under the recently enacted subchapter V chapter 11 provisions. 

© 2024 Bracewell LLP
National Law Review, Volumess X, Number 93