Small businesses have traditionally had difficulties reorganizing under Chapter 11 of the Bankruptcy Code. The legal fees necessary to prepare a plan and disclosure statement and navigate the confirmation process were often prohibitively expensive. Further, the reporting requirements and United States Trustee fees mandated by Chapter 11 added significant expenses to the already struggling debtor’s cash flow.

The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act expands the application of the Small Business Reorganization Act of 2019 (SBRA) to more distressed businesses. The SBRA gives qualifying businesses and their owners more leverage to reorganize in bankruptcy court over the objection of creditors. The SBRA process is also less expensive and more streamlined than a typical Chapter 11 case.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) went into effect. While coverage of the CARES Act has focused primarily on tax relief and provisions to extend loans and other forms of assistance to impacted businesses and individuals, the law also temporarily expanded eligibility for companies seeking bankruptcy protection under the recently enacted Small Business Reorganization Act of 2019 (“SBRA”).

The federal government made bankruptcy a viable option for small businesses with the passage of the Small Business Reorganization Act of 2019 (SBRA). The act, which became effective Feb. 19, is designed for smaller businesses that cannot afford the high administrative fees and costs associated with traditional Chapter 11 reorganizations.

Barely a month after Bankruptcy Code amendments providing a cheaper, more efficient path to chapter 11 relief for small businesses took effect under the Small Business Reorganization Act of 2019 (“SBRA”), Congress has nearly tripled the debt-eligibility threshold from roughly $2.7 to $7.5 million in response to economic fallout from the COVID-19 shutdown.

On February 19, the Small Business Restructuring Act (SBRA) — the most significant change to the Bankruptcy Code in 15 years — went into effect. The SBRA, also known as Subchapter V of Chapter 11, removed numerous barriers that had long prevented small businesses from reorganizing in bankruptcy. On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) went a step further and significantly expanded eligibility under Subchapter V by raising the debt limit from $2.7 million to $7.5 million. This overview answers key questions about how these new laws work.

President Trump signed the Small Business Reorganization Act of 2019 (the “SBRA”) into law in August of last year and it became effective on February 20, 2020. The SBRA amended the U.S. Bankruptcy Code and is designed to simplify and shorten the reorganization process for “small businesses” and to make the entire process more cost effective. At the same time that the SBRA was coming online, the U.S. economy experienced a severe downturn as a result of the COVID-19 pandemic.

The Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act”) which Congress approved last week, together with the Small Business Reorganization Act of 2019 (the “SBRA”) which became effective on February 19, 2020, will make Chapter 11 bankruptcy protection much more attractive for small business debtors.

The newly enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act) contains some significant bankruptcy-related provisions, including those which amend the Small Business Reorganization Act of 2019 (SBRA) to make bankruptcy relief available to an increased number of small businesses.

For those who are contemplating the need to develop a bankruptcy strategy – and for creditors evaluating a debtor’s bankruptcy plan – it is important to understand these changes in the law.

On February 19, 2020, the federal Small Business Reorganization Act (SBRA) took effect, providing qualifying small businesses access to a streamlined and less expensive version of the traditional Chapter 11 bankruptcy process. On the heels of SBRA, and in light of the coronavirus outbreak, the March 27, 2020 enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided further relief and opportunity to small businesses by including particular bankruptcy provisions.

Eligibility to File Bankruptcy under the SBRA and CARES Act