The Small Business Reorganization Act was passed to make it easier for small business to reorganize their finances, dump unprofitable relationships, and shed debt. It set up a special Sub Chapter V to Chapter 11 of the Bankruptcy Code providing for streamlined proceedings and more flexibility. Most importantly, it eliminated the “absolute priority rule” which means that, for the first time, small business can actually discharge debt instead of having to sell off assets or reaffirm debts solely to pass muster under regular Chapter 11 rules for Plan Confirmation. This law even allows Debtors to spread out their fees and costs over the course of a Plan helping to prevent administrative insolvency and failure of the case.
The law was intended to help small businesses. It was passed defining small by the amount of debt, under $2,725,625. Then, along came COVID. The CARES act extended that Debt limit to $7,500,000. But, this is a limited time opportunity under the law. It will expire in March 2022 and the limits will drop back to pre-pandemic levels.
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