Small Business Bankruptcy Provisions in the Proposed “Coronavirus Aid, Relief, and Economic Security Act”

By: Neil J. Smith

At the time of this writing, the Senate has now passed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the bill now awaits final approval by the House of Representatives and the President to be enacted into law. In addition to the well-publicized provisions providing direct financial relief to individuals and making additional loans available to distressed companies throughout the United States, the CARES Act will also substantially increase the viability of Chapter 11 for small businesses that need to avail themselves of bankruptcy protection.

Earlier this year, the recently enacted Subchapter V of Chapter 11 of the Bankruptcy Code came into effect. Prior to the enactment of Subchapter V, Chapter 11 was typically a far too expensive and complex procedure for most small businesses to take advantage of. The small business friendly provisions of Subchapter V eliminated some of the more onerous requirements of Chapter 11, making Chapter 11 operate much more like the simplified procedures under Chapter 13 (repayment plans for individuals) and Chapter 12 (repayment plans for family farmers).

The catch was that the definition of “small business debtor” was fairly restrictive. Under current law, only business debtors with non-contingent, secured and unsecured debt less than $2,725,625 could elect Subchapter V treatment. This threshold is far too low – many small and mid-sized businesses have more than $2.7 million in debt, but do not have the resources to successfully navigate a full-fledged Chapter 11 reorganization.

In the CARES Act, the Senate has heeded the calls of the bankruptcy bar and proposed an increase of the debt threshold to $7,500,000.00. This will substantially increase the availability of Subchapter V relief for many companies throughout Central New York. If the CARES Act is passed, small to mid-sized companies will now have an effective tool to manage their debts and reorganize in Bankruptcy Court without having to either liquidate under Chapter 7 or pay impossibly high costs in Chapter 11.