The president signed the Small Business Reorganization Act (SBRA) in August of 2019, but it officially takes effect in February of 2020. Congress designed this popular law to fill a previous gap by providing small businesses and owners with a way to restructure or reorganize in bankruptcy court. Chapter 11 was generally designed for multi-million-dollar companies with staff, and Chapter 13 restructuring could be used by sole proprietors because individuals qualified for Chapter 13. However, Chapter 11 was not always a viable alternative for small businesses that were partnerships, LLC, corporations, or another type of business structure.

In short, the law simplifies the Chapter 11 procedure by defining the small business debtor as an entity with a non-contingent secured or unsecured debt of less than $2,725,625.

How it helps small businesses

Some of the notable changes to Chapter 11 include:

  • Debtors have more options for negotiating with creditors
  • Debtors can also confirm restructuring with bankruptcy court over the objections of creditors
  • Faster resolution means less overhead than a longer more drawn-out process
  • Rather than selling off assets to pay debts, this restructuring enables businesses to continue
  • This may allow small business owners to hold onto assets used as collateral to open a business
  • It eliminates a competitive advantage given to larger businesses

Some areas still undefined

It remains to be seen how effective SBRA will be. Moreover, there are grey areas that could reveal unforeseen circumstances when small companies to negotiate their restructuring plans. Nonetheless, bankruptcy law is often complicated and confusing, particularly when there are changes like SBRA.

Those who choose to file are often best served by working with an experienced bankruptcy law attorney who can tailor solutions to the needs of the client and their business, whether it is using SBRA or choosing a different option.