With the Small Business Reorganization Act (SBRA) up and running as of February, 2020, Chapter 11 of the bankruptcy code now has two separate sections that offer corporate debtors (and a few individuals) a discharge of their debts. This is something of a new frontier in American bankruptcy law, as up to now each chapter had a single set of discharge rules, and switching between chapters (“converting a case” in bankruptcy lingo) was the only method for shopping for a more favorable discharge, where it was possible.
Discharge.
The “standard” Chapter 11 discharge is found in section 1141, inconspicuously entitled “Effect of Confirmation.” This spells out that discharge occurs upon confirmation of a Chapter 11 plan, except for flesh and blood individuals who file under Chapter 11. Their discharge occurs when they have made all the payments due under the plan.
Under the standard discharge, debts that occurred before the bankruptcy filing are wiped out, as well as certain post-petition claims involving rejected leases, recovered property, and certain taxes. The discharge is not dependent on a creditor’s claims being filed, allowed, or upon the approval by a creditor of the plan. 11 USC s. 1141 (d). Discharges for individuals are subject to the usual exceptions (student loans, etc). Individuals, but not corporations, may seek a discretionary hardship discharge if they are able to make most, but not all, of their plan payments. There is no discharge for anyone if the court find that the case is a disguised Chapter 7 liquidation. Tax bills tied to fraudulent returns are not discharge, and taxes due on late-filed returns within two years prior to the case filing aren’t either.
In comparison, the SBRA discharge provision is found at 11 USC s. 1192. This section specifies that small business discharges are issued upon completion of plan payments, not upon confirmation of the debtor’s plan. Since SBRA plans must be at least three years in length, it follows that discharge is at least three years down the road for the small business debtor.
The SBRA discharge applies to pre-petition debts under the same terms as the standard discharge, plus any specifically allowed claim that is “provided for” in the plan (expect litigation here, on the meaning of what is provided for).
The SBRA discharge specifically excludes priority tax debts (which is not expected to be controversial), as well as any debt on which the last payment is due after the 3-5 year length of the plan. This last section is a severe limitation which could be a deal breaker for many small firms looking to reorganize in the wake of corona virus closures.
By Doug Beaton
Attorney Douglas J. Beaton has practiced bankruptcy law in the Northeast for twenty six years, and is an active commentator on developments in bankruptcy practice and procedure. He can be contacted through this form: