New Bankruptcy Law for “Small” Businesses (and Those Who “Run” Them)
On August 23, 2019, the President signed into law an amendment to the Bankruptcy Code that establishes a new Chapter 11 reorganization process for small to medium size businesses and business owners with substantial assets and business liabilities. The law also raises the threshold regarding the venue of the claw back of preferential transfers across all cases, thus protecting most individuals and businesses by forcing a preference action for less than $25,000. A preference is a claim by the debtor to take back money paid to the creditor on an “old” debt. The preference action is filed against the creditor in the district court where the creditor resides rather than where the bankruptcy is filed. Also the new law requires those seeking recovery of preference payments to conduct reasonable investigation and take into account the affirmative defenses of the creditor. The preference action is filed against the previously paid creditor. The new Chapter 11 procedure will greatly benefit small businesses by providing an affordable process for restructuring and a less predatory process for preference litigation.
Small Business Bankruptcy
By definition, a small business debtor is any person or company engaged in commercial or business activities who has non-contingent liquidated secured and unsecured non-insider debt totaling an amount not more than $2,725,625. The new Subchapter V of Chapter 11 provides a more stream-lined procedure for small business debtors. Unless the Court orders for cause, there are no creditors’ or equity committees, thus substantially reducing the administrative costs of bankruptcy, affording more money to the debtor to pay its creditors and operate its business. The United States Trustee will establish a Standing Chapter 11 Trustee to generally monitor and police these cases, facilitate the development of a consensual plan and ensure performance under confirmed plans (including being the conduit for payments). Notwithstanding the powers and duties of the Standing Trustee, the small business debtor can manage his/her business and financial affairs during the reorganization process.
Additional costs of Chapter 11 are reduced by the following:
1. A limitation of status conferences and a streamlined procedure for disclosing the intent of the debtor and efforts to reorganize;
2. Generally, no disclosure statement is needed;
3. The initial plan is due 90 days from the filing date, although that deadline can be extended if the relay is attributable to circumstances for which the debtor should not be help accountable;
4. Administrative expenses arising after the filing can be paid through a confirmable and feasible plan.
Further, the new law permits an individual small business debtor broader rights to modify secured claims on the principal residence of the debtor so long as the new money received in connection with the granting of the security interest was not used primarily to acquire the residence and was used in connection with the small business of the debtor. Of critical note, the new law provides broader freedom for the individual business owner to propose a fair and equitable plan that does not provide for full payment to creditors or the dedication of projected disposable income over the next 5 years. The expenditures necessary for the continuation, preservation, or operation of the business of the debtor are credited against the income of the business to determine what is disposable to pay creditors over a period of no less than 3 years.
The Effective Date of the new law is February 19, 2020. The legislation can be found here:https://www.congress.gov/bill/116th-congress/house-bill/3311/actions
To learn more and discuss any questions you may have, contact David M. Neumann at 216-831-0042 or email at email@example.com.
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