In August of 2019, Congress did something that’s become a bit unusual — it passed bipartisan legislation, and saw it signed in to law by the President. The particular bill was a sweeping change to the federal bankruptcy code that was intended to open up Chapter 11 reorganizations to small businesses for the first time.
While small businesses — and indeed individual Americans — had never been banned from Chapter 11, the expense associated with the fearsome complexities of the existing laws made Chapter 11 a difficult choice for all but the largest operations.
The new changes, dubbed the Small Business Reorganization Act of 2019, took effect six months later on February 19, 2020. The timing was prescient, as it virtually coincided with the onset of the corona virus’ arrival in the United States.
Less than one month in operation, the S.B.R.A. has already seen its first amendment — and it is an important one.
In the original legislation, a small business was defined as any business with less than $2.7 million dollars of total debt. One criticism of the new law before it took effect was that this figure seemed arbitrarily low, excluding some firms that were certainly small, even though their total debts might be slightly higher than the announced cap.
But with the abrupt halt to the economy brought on by Covid-19 protective measures, Congress relented a bit, and on March 27, 2020 increased the debt ceiling on a streamlined Chapter 11 case to $7,500,000.00. This should help a whole raft of firms that are hurt by the slowdown qualify for a bankruptcy reorganization for the first time.
Please note that the $7.5M ceiling is based on a firm’s total debt — secured loans like mortgages and inventory, PLUS unsecured bills like utilities and rent and taxes.
Still, a lot more small businesses are going to qualify now that the limit has been raised. And while it’s never a sure thing to bet on what Washington will do, there is a least the possibility that the limit could be raised further in the future, if processing the initial round of cases goes smoothly.
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: