By Dennis T. Lewandowski, Bankruptcy, Creditors’ Rights & Business Restructuring, Lender Representation

Bankruptcy Law Changes

In February, new provisions added to bankruptcy law will make bankruptcy a more likely option for small businesses in financial difficulty. The Small Business Reorganization Act of 2019 was designed to promote simplicity and efficiency and will more easily allow business owners to clean up their balance sheets while still maintaining their ownership interests. The Act creates a new subchapter of the reorganization chapter of the Bankruptcy Code for businesses with secured and unsecured debt of not more than $2,725,625.

The new law is, in some ways, modeled after Chapter 13 reorganization bankruptcies for individuals and includes the following significant revisions:

• no disclosure statement is required
• a streamlined version of the information normally required by the disclosure statement is to be provided in the plan of reorganization, which only the debtor can file
• there are no solicitation and voting requirements for confirmation and creditors do not have the right to vote on the plan, but may object to confirmation
• funding for the plan will come from all disposable income of the debtor during the next 3 to 5 years
• the new law eliminates the absolute priority rule, allowing the business owners to keep their ownership interests without paying creditors in full or providing new value
• the plan can modify the rights of a creditor secured by a security interest in the debtor’s principal residence if the loan secured by the residence was not used to acquire the residence but was used in connection with the debtor’s business

The new bankruptcy law could have a significant impact on lenders. Bankruptcy will now be a more realistic option for small business debtors who will be able to confirm plans that lenders may not approve of and modify the repayment terms regarding loans secured by residences where the funds were used for business purposes. Also, issues raised by the new law will need to be resolved by the courts, as the involved parties navigate their way through this new process.

If you have any questions regarding the new provisions or lender issues in general, please contact Dennis Lewandowski at (757) 624.3252 or dtlewand@kaufcan.com.

The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.