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The benefits to filing a business bankruptcy case would include an automatic stay from creditors proceeding to collect against debts owed by the business. The stay is imposed automatically upon the case filing. This allows a breathing spell to permit a Debtor to attempt to constructively analyze the entire debt picture of the company to see a negotiated plan of reorganization for the entity to address their debt in a uniform manner rather than an ad hoc approach.

The business bankruptcy provides an opportunity for advice of counsel, accountants, and others who would be retained by the Debtor in the case to provide guidance and instruction to the company to examine different strategies to try to address the problems that created the insolvency of the company.

What Is The Small Business Reorganization Act?

The Small Business Reorganization Act is a new subchapter in the small business section of Chapter 11 of the bankruptcy code. A small business debtor may now elect to have its case administered under Subchapter Five. This section of the bankruptcy code creates some advantages and also provides for a streamlined method to address the debt of the business. One of the significant provisions of the Small Business Reorganization Act is a plan must be filed within 90 days of the filing of the case.

The court will also schedule a status conference 60 days after the filing of the case, at which time one of the primary issues to be addressed will be what is the status of the debtors’ plan and whether they expect to be able to file it in a timely manner within the 90-day requirement under the Small Business Reorganization Act. A new section of the Small Business Reorganization Act provides for the appointment of a trustee in every case. The trustee is going to function somewhat differently than a trustee who was in control of the business affairs and might be viewed more as a facilitator, who will have a variety of duties to assist the debtor in reaching a consensual plan of reorganization. The trustee will appear at the status conference and other major hearings and coordinate with the debtor and their representatives to assist them in meeting the deadlines and filing the plan.

The major changes to the bankruptcy code for Subchapter Five cases under the Small Business Reorganization Act involves the application of a provision of the Bankruptcy Code called the Absolute Priority rule, that will no longer apply to these cases. The Absolute Priority rule prohibited distributions to any one class of creditors unless the creditors who have higher priority are paid in full. This is a major development in the law, which will be very significant in helping small businesses reorganize their business affairs because frequently, the equity holders in the company who would retain the company could not retain their equity interest in the company unless they provided some contribution to the creditors, commonly known as “new value”.

The Subchapter Five debtors will also not be required to pay quarterly fees to the United States trustee and they will be closely monitored and assisted with the new trustees, which will be appointed at the inception of each case.

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Michael McLaughlin, Esq.

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