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INSIGHT: Narrow Bankruptcy Reforms Make Big Changes for Small Business, Vets, Farmers

Oct. 23, 2019, 8:01 AM

Three important pieces of bankruptcy legislation were signed into law this summer. The legislation did not make substantial structural changes to the bankruptcy system, but the laws do meaningfully impact three important constituencies: small businesses, veterans, and family farmers.

Reorgs Easier for Small Businesses

The most important legislation signed into law was the Small Business Reorganization Act of 2019 (SBRA) (H.R. 3311), effective Feb. 20, 2020. When it takes effect, getting a small business plan confirmed should be easier and quicker, provided that the company is transparent about its financial conditions and can demonstrate a path forward that returns it to profitability.

This legislation grew out of the American Bankruptcy Institute’s Chapter 11 Bankruptcy Reform Commission and makes a number of changes to existing law governing small business reorganizations. The changes are designed to streamline and reduce costs, and seek to enhance a debtor’s ability to navigate and survive the bankruptcy process.

The monetary limitations of a small business under Chapter 11 of the Bankruptcy Code were not modified and currently provide a debtor’s non-contingent, secured and unsecured debts cannot exceed $2,725,625, but the SBRA added a requirement that not less than 50% of the debtor’s debts must have arisen from the debtor’s business activities.

In addition to addressing eligibility, the SBRA created a new role in small business cases and established the automatic appointment of an independent trustee. The legislation provides the trustee will oversee the bankruptcy process, and ensure the performance of the plan and ultimate payments to creditors.

In addition to a trustee, the SBRA streamlines the Chapter 11 bankruptcy process in recognizing that in small business cases, unsecured creditor committees are not necessary nor is it necessary to have a separate disclosure statement approved by the court.

Another important provision of the SBRA is the removal of the requirement that a class of creditors approve a plan for it to be confirmed. Rather, the court can determine that a proposed plan is “fair and equitable” over creditor’s objections and the debtor can still have their case approved.

A final, key feature of the SBRA is the absolute priority rule, which requires all creditors be paid in full before equity can retain its interests, is abrogated. As a result, small business owners can retain their ownership interests, propose a plan that is fair and equitable, even if it does not pay all creditors “in full.”

For small business owners and their creditors, this legislation will change some of the dynamics found in these cases.
Creditors will no longer be able to unilaterally block small business plans, but the safeguards of an independent trustee and mandated judicial finding that the plan is in the “best interests” will hopefully lead to better returns for claimants.

Lawyers and credit professionals should begin familiarizing themselves with these new tools. As with most legislation, there may be a rocky start, but this legislation is surely going to change the dynamics of small business insolvency.These important changes are likely to have a substantial impact on small business Chapter 11 cases.

Veterans

The Honoring American Veterans in Extreme Need Act of 2019 (H.R. 2938) (HAVEN) is an important new law, but modest in scope, and took effect on Aug. 23.

Current law protects Social Security disability benefits in the event an individual files for bankruptcy, but recent case authority revealed an anomaly in the law. This was fixed by the HAVEN Act to ensure that disability benefits earned by military veterans are similarly protected benefits. Namely, the bankruptcy exemption provisions were expanded in the event a veteran must file bankruptcy.

Over 125,000 veterans filed for bankruptcy in 2017. Thus, albeit a narrow revision of the law, it is extremely important to those in need. Moreover, it reconciles outstanding public policy that protects similarly situated disability benefits from creditors in the event an individual files for bankruptcy.

Family Farmers

The Family Farmer Relief Act of 2019 (H.R. 2336) took effect on Aug. 23 and is, again, important relief tailored for a specific class of debtors—family farmers who are eligible for relief under Chapter 12 of the Bankruptcy Code. Previously, these farmers had an eligibility cap of approximately $4.4 million of debt in order to access the special provisions of Chapter 12.

Through a bipartisan compromise, Congress recognized that it was appropriate to adjust and increase the debt relief limit to $10 million. The debt limit had not been raised in many years, and Congress recognized that in order to protect family farmers, many of whom are currently struggling due to years of sluggish profits, environmental conditions, and other factors, expanding the scope of those eligible for the protections was important.

The family farmer bankruptcy provisions in Chapter 12 are important tools that allow for a restructuring due to a farm’s unique financial and economic challenges. Specifically, enormous land and capital costs are inherent in family farms and thus merit special treatment in the Bankruptcy Code. This increase in the debt limit expands the scope of family farms now eligible for Chapter 12 bankruptcy relief.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

R. Scott Williams is a partner in Rumberger Kirk & Caldwell’s Birmingham office, where he represents parties in complex commercial bankruptcy and litigation matters.