Most small and middle market companies in financial distress view the Chapter 11 bankruptcy process as a daunting, lengthy, and expensive method for restructuring their financial affairs.  As a result, those companies increasingly have avoided Chapter 11, depriving them and their creditors of many of the benefits and certainty of the Chapter 11 process.

Congress in 2019 enacted the Small Business Reorganization Act (SBRA), which became effective on February 19, 2020, creating a new “Subchapter V” of Chapter 11.  The SBRA streamlines the Chapter 11 process, with the aim to make small business bankruptcies faster and less expensive, and also enables equity holders to retain their equity interests even if all creditors are not paid in full. 

The SBRA originally was limited to companies with debts up to $2,275,625, but in response to the economic impact of the Coronavirus pandemic, Congress recently raised that debt ceiling to $7,500,000 (until March 27, 2021, but that increase could become permanent or be extended).

Certain features of the SBRA may result in secured parties having fewer pressure points to exert influence on the outcome of a debtor’s plan than they would have in an ordinary Chapter 11.  Nonetheless, the fundamental rights of a secured creditor are not eliminated under the SBRA, and there are still ways that those creditors can be proactive in the now-streamlined small business bankruptcy process to ensure that their rights are protected.  

A few key highlights of the SBRA:    

Streamlined Reorganization Process. The SBRA streamlines small business reorganizations and removes procedural burdens and costs associated with typical corporate reorganizations.  Subject to the Bankruptcy Court’s right to order otherwise in certain circumstances, the SBRA provides:

  • No unsecured creditors’ committee will be appointed;
  • Only the debtor can propose a plan of reorganization;
  • The debtor must file its plan within 90 days after the petition date;
  • The debtor does not need to file a separate disclosure statement for the plan; and
  • The debtor is not required to pay US Trustee or Bankruptcy Administrator fees.


    • Eliminating requirement to pay UST fees also removes at least one often-uncertain component of the carve-out calculation in DIP financing or cash collateral orders.
    • The mandated speed of the SBRA reorganization case highlights the need for the lender to require, and the debtor to provide, a “full case” budget in addition to the more standard 13-week cash flow.  Lenders will want to have a better understanding of the full liquidity needs and projections rather than a rolling forecast.

    Appointment of a Trustee. The SBRA essentially replaces the committee’s role by mandating appointment of a “Subchapter V Trustee” whose role is to help facilitate the small business debtor’s reorganization and monitor the debtor’s consummation of its plan of reorganization – but not to take control of the business.  The debtor remains a debtor-in-possession and will continue to operate its business.  The business owner will need to provide the Trustee with tax returns, account information and financial information, such as assets, liabilities and cash flows.

    The Plan. The SBRA contemplates a bit of a hybrid of a traditional Chapter 11 plan and a Chapter 13 “wage earner” plan.  The debtor’s SBRA plan must contain a brief history of the business operations, a liquidation analysis, and a projection of the debtor’s financial results for the plan period (between 3 and 5 years) in order to demonstrate its ability to make payments under the proposed plan, and all of the debtor’s disposable income must be dedicated to the plan.

    Confirmation of the Plan. The plan may be approved if it is feasible, does not unfairly discriminate, and is fair and equitable as to nonconsenting, impaired classes of creditors.  For SBRA plans, if any impaired class of unsecured creditors objects or rejects the plan, the plan may be deemed “fair and equitable” (and confirmed in a “cram down”) if the plan provides that all “projected disposable income” of the debtor is applied to make plan payments.  (For secured creditors, the same cramdown standards apply as in a traditional Chapter 11 case.)  The SBRA defines disposable income as all income to be received by the debtor over a three-year period, or up to five years at the court’s discretion, beginning on the date the first plan payment is due.  

    Note: This calculation will require diligence by the Trustee and by secured creditors – and may be fertile ground for litigation – to go behind the debtor’s projections and be certain that the debtor has not inflated expected expenses with salary increases and the like, in order to reduce its projected “disposable income.”  Therefore, the secured creditor needs to have a good understanding of the debtor’s cash flow and its true disposable income before the debtor proposes and confirms a plan. 

    In addition to the disposable income requirement, a debtor must demonstrate the plan’s feasibility by showing that it will be able to make all payments under the plan or that there is at least a “reasonable likelihood” that it will be able to make all of its payments.  

    Note: This is expected to be the genesis of perhaps the most negotiation and litigation in SBRA cases, and the Subchapter V Trustee should have a central role in assessing the feasibility of the plan and whether the debtor’s projections are realistic, as a function of the Trustee’s statutory charge to “facilitate the development of a consensual plan of reorganization.”

    Elimination of the Absolute Priority Rule. This may be the most significant change from traditional Chapter 11 in terms of impact on creditors.   Creditors are generally familiar with the “absolute priority rule” in Chapter 11 that prevents the debtor’s equity holders from receiving or retaining their equity if creditors are not paid in full or have not agreed to accept less than full payment.  This provided a significant incentive for debtors to negotiate consensual plans.  The SBRA abolishes this rule, and along with it any suggestion that equity holders of the small business debtor provide “new value” to retain their equity interest in the debtor without paying creditors in full.  Eliminating the absolute priority rule undoubtedly makes it easier for small business owners to maintain ownership after bankruptcy, and shifts the focus of plan preparation and negotiation to defining the owners’ goals and determining whether the debtor realistically can generate sufficient cash flow to achieve those goals. 

    The increased likelihood of current equity remaining in place following plan confirmation under the SBRA highlights the importance of secured creditors maintaining a good working relationship with distressed borrowers as they contemplate their restructuring alternatives.  Obtaining reliable financial information and projections prior to a borrower commencing a SBRA filing (perhaps through a financial consultant), will provide important data for purposes of plan negotiations and litigation.

    Note:  Elimination of the absolute priority rule serves to underscore the importance of obtaining personal guaranties from principals of small businesses.  Whether obtained at the front end of a loan or later in forbearance, having recourse to the business owners should provide not only additional sources of recovery for lenders, but also leverage for the lender in plan negotiations.

    Delayed Payment of Administrative Expense Claims. The SBRA makes exit from bankruptcy a bit easier for small businesses by removing the requirement that the debtor pay administrative expense claims – including those claims incurred by the debtor for post-petition goods and services – on the effective date of the plan. Unlike a typical bankruptcy, a small business debtor may now stretch payment of administrative expense claims out over the term of the plan.


    • This will lessen the immediate cash needs of the debtor at confirmation; but
    • For DIP lenders this also reinforces the importance of providing in DIP loan documents and approval orders that the DIP loan must be paid in full at confirmation, to avoid the risk of being treated like other administrative expenses.


    Very few cases have been filed under this new law, but many more are expected in the near future. This high-level overview covers a few key provisions of the new law that Bankruptcy Courts, debtors and parties in interest will soon navigate in real time amidst the fallout of the COVID-19 pandemic.  Secured creditors will still have significant influence over the Chapter 11 process in SBRA cases, but should expect that these cases will move quickly, which may ultimately prove beneficial because cases will not drag out unnecessarily.  But a secured creditor will need to be prepared to quickly deploy necessary resources to these cases in order to ensure that it retains a strong position and better protects its rights throughout these cases.