Alex, who was quoted extensively in the article, called the new law very exciting for bankruptcy professionals. He explained that the SBRA “sets a [Chapter 11 reorganization] standard for small businesses that is much, much easier to achieve.” He said it “effectively provides similar relief to small businesses that individual debtors currently receive under Chapter 13.”
“If a business has total debt, secured and unsecured under [$2,725,625], they have access to this act where they can propose a [plan of reorganization],” Alex explained. “As long as they are devoting all of their net income to the repayment of creditors, they can get that plan confirmed. That’s not the case in the normal Chapter 11.”
Alex also observed that creditors’ committees tend to multiply the costs of Chapter 11 with the hiring of lawyers, accountants and other specialists.
“When you have a creditors’ committee, you’re effectively doubling that cost because they have the same set of professionals [as the debtor] doing a lot of the same work, but on the creditors’ behalf instead of the debtor,” he said.
Likewise, Alex said that administrative costs are multiplied if creditors or a purchaser proposing what amounts to a hostile takeover are allowed to submit reorganization plans in competition with the debtor’s proposed plan.
“Then you have a possibly lengthy, possibly complicated, certainly expensive process where the two plans fight it out,” he said. “Perhaps the creditors will have to vote on two or more plans, and the court will have to hold hearings on all of the plans until one comes out on top. The expense is very considerable.” Alex explained that the SBRA provides an avenue to eliminate the risk of the debtor “drowning” in those administrative expenses.
According to Alex, a critical component of the SBRA is that it allows the debtor to retain his or her business without paying unsecured claims in full or contributing “new value” under the plan as called for under current Chapter 11.
“That’s very onerous on small business owners, which might be a single individual or family,” he said. “Often, they may have already carried the business for a considerable amount of time, dipping into their pockets prior to the bankruptcy, and they often can’t afford to contribute still more funds.”
While the SBRA gives more control of the Chapter 11 process to debtors at the expense of creditors, Alex said creditors for the most part will likely be fine with the changes, noting that creditors tend to prefer the orderly adjudication of claims in Bankruptcy Court as opposed to state collection actions.
“Outside of bankruptcy, your recourse is to go to the court to try to get liens, try to get a sheriff to execute on an asset,” Alex said. “All of that is pretty difficult and uncertain, and you’re doing it in competition with every other creditor.” It is usually a better result for a creditor if the debtor stays in control and reorganizes, he said.
“That’s particularly true if you’re an unsecured creditor because you at least get some payments,” he said. “Whereas if they liquidate, you’re likely to get nothing.”
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