Understanding the Small Business Reorganization Act

With Covd-19 and the differing attempts by state and local government to contain the spread by various regulations, smaller companies in the almost every industry have often been negatively affected by state regulations.

As a result of states where small business has been affected by COVID regulations, some companies may find themselves of the brink of insolvency.

Until recently, there have been two chapters of the bankruptcy code for the use of insolvent companies: Chapter 11 and Chapter 7.



Chapter 11 was designed for the restructuring of companies that have a future business.  Chapter 7 is designed for the liquidation of companies without a projected future due to market forces or excessive debt.

For a smaller company, Chapter 11 is often far too expensive.  It requires a source of significant cash and a plan that has been worked out far in advance. 

Chapter 11 professional fees can begin at $100,000 and for a mid-sized company can become five times that figure. Most financially distressed small and mid-sized companies have neither the cash to support the fees nor have done the planning.



In August 2019, congress created The Chapter V subsection of Chapter 11.  Known as the SBRA or Small Business Restructuring Act, it is designed to let smaller companies take advantage of bankruptcy restructuring laws in a way that is both faster and less expensive.

To be eligible for Subchapter V, a debtor must be engaged in a commercial activity and its total debts must be less than $2,725,625.

The new CARES act has temporarily (for one year) has expanded that debt level to $7,500,000.

This increase allows larger companies to take advantage of Chapter V. Upon filing its bankruptcy petition, the Chapter V debtor must also file a balance sheet, statement of operations, cash flow statement and federal tax returns.



The court will appoint a trustee.  The Sub-chapter V trustee does not take possession of a debtor’s assets and lacks the ability to sell those assets. The trustee is more like an advisor and handler; facilitating the development of a consensual reorganization plan, appearing at hearings, and ensuring that the debtor makes timely payments under the plan. The debtor must also pay the trustee.

The Chapter V process moves at light speed by traditional Chapter 11 standards. The court will hold a status conference within 60 days. At least 14 days prior to that conference, the debtor must report, in writing, the efforts made and to be made to obtain consensual plan.

The debtor and only the debtor must file its plan of reorganization within 90 days of the filing. The plan must include a brief history of the business operation, a liquidation analysis and financial projections demonstrating the ability of the debtor to make the proposed plan payments.



To get a plan confirmed in Chapter V, it does not require acceptance by creditors.  It must not discriminate unfairly and must be fair and equitable.

Creditors must receive as much as they would if the debtor were liquidated in Chapter 7. 

Subchapter V includes an option for the debtor to contribute all “projected disposable income” to making plan payments for three to five years. 

Projected disposable income is everything after expenses to maintain and support the debtor and expenses necessary for business operations.

This provides an advantage to creditors to whom the debtor owes money and doesn’t have the ability for immediate payment but is projected to have the funds over the life of the plan.



To confirm a plan, the court must find that the debtor will be able to make the payments ordered under the plan or there is, at least, a reasonable likelihood will be able to make the payments under the plan and the plan has appropriate remedies to protect the creditors is payments are not made as proposed.

The SBRA contains many other provisions. A debtor’s attorney and the trustee can help ensure that the filing and plan are compliant with Subchapter V.


Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering or Receivership/Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.

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Over the years, through our many assignments, the Principals of Revitalization Partners frequently said to ourselves: “One day, we should write a book about our work and how we can help companies through our experiences.” This is that book and we hope that you find words of value to you and your business.

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