For small businesses facing insurmountable debt, a new bankruptcy provision is providing a more accessible way to stay afloat.
It’s part of the Small Business Reorganization Act made effective in February, and it adds to the Chapter 11 bankruptcy code.
“The problem with a Chapter 11 bankruptcy is that it’s one size fits all,” said Norman Rouse, a bankruptcy attorney at Collins, Webster & Rouse PC in Joplin who represents clients in southwest Missouri. “The type of bankruptcy that GM filed under Chapter 11 is the same law that applies to the convenience store down the street.”
Additionally, it’s particularly costly for a small business to file for reorganization and receive court approval to restructure debt and payments to creditors, with Chapter 11 application filing fees starting at $1,717.
“All of this becomes expensive under Chapter 11, which has requirements and fees that would way exceed a mom-and-pop shop,” Rouse said.
This is where the SBRA comes in. The act applies to businesses with less than $2.7 million in debt, plus additional changes like timeline modifications that cater to smaller businesses.
“The objective was to make it simpler for small businesses to get through Chapter 11 and make it less expensive for them,” said Rod Nichols, partner at Spencer Fane LLP.
Nichols also pointed to an analysis of Federal Judicial Center Integrated Bankruptcy Petition data that found 42% of Chapter 11 cases filed since Oct. 1, 2007, would have been eligible to proceed under the SBRA.
“The thought is that eventually, as case filings increase, we’re going to see more and more cases proceeding under the SBRA,” Nichols said.
According to the American Bankruptcy Institute, changes under the SBRA and the new Subchapter V code include appointing a trustee to facilitate the reorganization plan.
“In no other place does the bankruptcy code authorize a trustee to help a debtor in possession develop a plan of reorganization,” the ABI’s website states.
Rouse has served not only as a U.S. trustee on Chapter 7 bankruptcy cases for more than 30 years but also as a trustee on about five SBRA cases in Missouri’s Western District, which covers Kansas City, Jefferson City and Springfield.
“My role as a Chapter 7 trustee is to look out for the benefit of the creditors,” Rouse said. “In a Subchapter V, I’m more of an intermediary. I’m trying to help the debtor deal with his creditors. It’s kind of a different perspective.”
The ABI also noted the SBRA allows for what is called “cram down” and eliminates the absolute-priority rule. In Chapter 11 filings, Rouse explained creditors are grouped into classes, and to receive confirmation, debtors have to put their reorganization plans out for a vote to approve or deny the plan.
“In a Chapter 11 scenario, at least one of the classes has to vote in favor of the plan or the court can’t confirm,” Rouse said. “In a Subchapter V, you don’t have to have any creditors voting in favor of the plan. You can still force it if it is fair and equitable,” and this concept is called cram down.
Rouse said Chapter 11 proceedings rank creditors into a hierarchy called absolute priority with the debtor or equity holder at the bottom of the list.
“Before the debtor can keep his business, unless he gets his creditors to agree, everyone ahead of him has to be paid in full, and that’s sometimes hard to do.” Rouse said. “In a Subchapter V case, there’s not that requirement. So the debtor can propose a plan that pays creditors less than what they’re willing to agree to, and if the court thinks that’s fair and equitable, then it can approve the plan under a cram-down concept.”
Bankruptcy in a pandemic
As part of the Coronavirus Aid, Relief and Economic Security Act, the SBRA’s debt limit was extended to $7.5 million through March 27, 2021, expanding the status to more businesses.
“Given the COVID-19 situation, everyone’s anticipating that there will be a wave of new bankruptcy filings in the future, and if that happens, we’re expecting a lot of people to take advantage of the SBRA. And probably you would expect to see a lot of filings right before the debt limit reverts to what it originally was in the act,” Nichols said.
Nationwide, only 845 cases had been filed under the SBRA through Aug. 16, according to Nichols, and only 10 cases were in Missouri’s Western District. He was not aware of any cases in Springfield.
“With COVID-19 and shutdowns, it really hasn’t taken off like they thought it would,” Rouse said.
“We might see a little uptick because there’s no more government funding right now. The Paycheck Protection Program helped a lot of businesses stay afloat for a while.”
The ABI reported a 78% increase in commercial Chapter 11 filings in September compared with the same month last year, and Chapter 11 bankruptcy filings were up 33% between January and September of this year compared with the same time period in 2019.
“The biggest concern that we’re visiting with people about is truly their finances,” said Chrystal Irons, director of Missouri SBDC at Missouri State University. “Many of them have already taken advantage of the Economic Injury Disaster Loan or PPP funding, so so if they are still struggling financially, we are helping them explore other financing options as well as discussing ways they can control their cash flow as they are recovering.”
Irons noted that any business that approaches the Missouri SBDC seeking bankruptcy advice is pointed in the direction of a bankruptcy attorney, but the center does serve as a resource for those struggling to make sense of their finances.
“We have people who are truly just trying to make it day to day, and they’re making financial decisions where they feel forced,” Irons said. “We try to coach people along because many times they feel really overwhelmed in that situation, so we just try to break it down into smaller pieces and even support the business owner as they’re exploring other options with an attorney.”
The U.S. Trustee Program noted the SBRA has shorter deadlines – debtors have 90 days from the day of filing to submit a reorganization plan – and greater flexibility in negotiating restructuring plans with creditors, and Irons believes that the financial strategies and guidance provided by the SBDC can help small businesses remain viable during and after submitting restructuring plans.
“I think the SBRA is going to be used by a substantial number of small businesses that fall below the debt limit because it is an attractive option for a Chapter 11 debtor,” Nichols said.
“It’s easier to get a plan confirmed; it’s more efficient. The overwhelming majority of debtors are going to opt to proceed under the SBRA.”
Local medical marijuana dispensaries must find ways to get creative with their marketing in light of industry advertising regulations released this summer by the Missouri Department of Health and Senior Services.
Marc Thornsberry, a Senior Engineer at CJW, says he joined the company after working in the public sphere. He says CJW had a ton of experience working with the community, and putting their customer's and clients.
Sandra Smart, a technology and commercialization specialist, shares helpful advice and cautionary tips about the importance of tracking cash flow for new or established businesses. Smart works with tech entrepreneurs and hosts training workshops through the Missouri SBDC at Missouri State University's efactory.
Michael Smith and Chris Sawyer, COO and CEO of Next Level Solutions respectively, discuss how they keep their remote teams and offices in and out of country on the same page. Next Level Solutions was ranked #1 in the Springfield Business Journal's 2021 Dynamic Dozen.
John Oke-Thomas, architect and co-founder of minorities in business, responds to the accusation that minority businesses are only successful because of the priority they have received in lending. He says that if a business uses a loan well, it shows their worth.
Sandra Smart, a technology and commercialization specialist, shares tips for entrepreneurs who are ready to seek funding. Some of her tips apply broadly; some target technology industry businesses. Smart works with tech entrepreneurs and startups, and hosts training workshops through the Missouri SBDC at Missouri State University's efactory.
Hollie Elliott discusses common misconceptions about locating your business in a small town. She says that there are a lot of benefits that people may not consider.
Drawing on his own experience dynamically evolving his company and business model, Jim Meinsen discusses when and how you might need to draw on new technology. Jim and Debbie Meinsen are co-owners of TCI Graphics in Springfield.
John Oke-Thomas, longtime Springfield architect, discusses his philosophy on architecture. He says that future historians will be focused on the sustainability of our contemporary architecture.
Erin Hedlun, director of marketing and communications at Evangel University, says compassion is an important job skill. Hedlun says it is a component of what makes a leader.
Rachel Barks, owner of Artistree Pottery, talks about the concepting that went behind the aesthetic of the business.