New Bankruptcy Law Offers Relief to Small Businesses

Starting February 20, 2020, small business owners on the brink of bankruptcy can breathe a little easier as Congress’ Small Business Reorganization Act goes into effect.

“I have been practicing bankruptcy law for 42 years and I am extremely excited about this new law because, simply put, it is a phenomenal breakthrough for small business owners,” reported Paul Hollender, an attorney with Corash & Hollender, which has offices on South Avenue. “Prior to this Reorganization Act, the only way to reorganize a business was to file Chapter 11, which is complex and basically out of reach for small companies because it can cost in excess of $100,000 to do. If a small business is failing, it’s safe to say that its owners have already spent almost all of their money to save it. This new law gives struggling business owners the gift of time and makes the whole process less expensive. It truly simplifies the concept of filing for bankruptcy.”

Signed into law by President Trump this past August, the Small Business Reorganization Act grew out of the American Bankruptcy Institute’s Chapter 11 Bankruptcy Reform Commission and makes a number of changes to existing legislation governing small business reorganization. First up, eligibility.

“If you have less than $2.5 million in debt, you are eligible for this Act,” Hollender said.

And the new Act requires that 50 percent or more of the debtor’s debts must have arisen from business activities. The legislation also created a new independent trustee role in small business cases.

“In turn, the trustee can appoint a panel or an independent bankruptcy lawyer can help supervise,” Hollender explained. “Unsecured creditor committees are also no longer necessary.”

The Small Business Reorganization Act puts approval of proposed payment plans into a court’s hands, allowing a judge to deem said plan as “fair and equitable” over creditors’ objections. And the “absolute priority” rule, which requires all creditors be paid in full before equity can retain its interests, has been repealed.

“Small business owners are affected by so many outside forces,” Hollender concluded. “The marketplace changes or some sort of extraordinary event leaves them with no working capital. Bankruptcy happens more often than you think. But this new law helps tremendously. It is a way of putting the brakes on bill collectors, allowing business owners to truly reorganize. It’s a concept that simplifies the Chapter 11 process, making it less expensive and allowing business owners to keep their business. All you have to do is make a little profit to pay your creditors. I, along with my firm, expect to be filing a lot of these claims in the coming year.”

Allan Katz, CFP and president of Comprehensive Wealth Management Group in Tottenville, agrees.

“There’s not a lot of changes in this new law, but they are important ones for small business owners,” he said. “Costs are reduced or spread out over time and personal mortgages and assets are now separate and harder for creditors to take away.”

According to Katz, it’s the type of provision small business owners need to rebuild and recoup.

“A lot of times people run a good business but bad things happen,” Katz concluded. “This will help dig those owners out of a hole and help them get back on a profitable road.”