Small business debt reorganization just got a lot easier

Many Americans talk about a sad decline of mom-and-pop, Main-Street, small businesses. The subject is a favorite among elected officials around election season. But for many years, advocates have pressed for changes in federal bankruptcy laws that could give struggling small businesses a fighting chance of keeping their doors open.

One strong and long-awaited change took effect only this year, and the word is still getting out to the small-business community.

Trying to level the playing field with big business

A long-standing criticism of U.S. bankruptcy laws is that they take good care of huge, Fortune 500 businesses. The arrangement, so these objections claim, allows these corporations to not only survive but thrive through challenges that would sink most family-owned businesses.

Indeed, until now, courts rejected the Chapter 11 bankruptcy filings of most small businesses. To add insult to injury, these filings were expensive and time-consuming for small businesses to complete and, if they even made it to the reorganization process itself, challenging to weather.

The Small Business Reorganization Act of 2019 (SBRA) was designed to give small businesses greater access to the reorganization process by lowering the costs and eliminating some of the hurdles needed for entry.

Some highlights of SBRA’s features

SBRA changes the disclosures a business must make as part of its filing. The standard disclosure statements were time-consuming expensive. Now, a filing requires only a much quicker and less expensive set of estimates, projections and background information.

Also, a trustee from the Department of Justice will now help establish and implement a plan that both the lending banks and small-business debtors can live with and benefit from. The participation of the DOJ trustee boosts the lending bank’s confidence in the process. Meanwhile, SBRA tightly controls the cost of the services the trustee provides so as not to burden the small business owner with additional costs.

In addition, the small-business debtor now has the chance to get significant powers they lacked before SBRA. For example, if the debtor got a home equity loan used for investing in the business, they might now be able to lengthen the time-span of the loan, reduce the interest rate or even lower the amount owed (“cram down” the loan).