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If You’re a Small Business, Now Could Be the Best Time to File for Bankruptcy. Here’s Why

By February 28, 2020No Comments

(This post originally appeared on Inc.)

Most small businesses around the country have been enjoying the growing economy, low interest rates, reduced taxes and increased demand over the past few years. Sure, there’s been some challenges, particularly with finding labor and navigating trade disputes. But for the most part, sentiment is almost at historic highs among small businesses nationwide, at least according to the most recent Small Business Optimism Index from the National Federation of Independent Businesses.

However, in a country as large as this one, there’s bound to be some small business owners that are finding themselves in precarious financial situations. It may be due to their location, their industry, poor management or just plain bad luck. For those that are thinking of folding up shop, there’s potentially good news: beginning this week, going bankrupt is now easier than ever before.

That’s because the Small Business Reorganization Act of 2019 (SBRA), which was signed into law back in August, went into effect last week.

It will be easier for businesses to reorganize and rehabilitate.

Up until now and under the current Chapter 11 law, filing for bankruptcy was a complicated task, particularly for smaller companies. But now those small businesses who have less than $2,725,625 of secured and unsecured debt can enjoy a new subchapter of Chapter 11 which takes a lot of the complexity out of the bankruptcy process, while also providing more options.

A business owner who wants to declare bankruptcy now has 90 days (it was previously 120) to come up with a reorganization plan and — significantly — is not required to form a “creditor’s committee” of interested parties which is the case under a typical bankruptcy filing. Instead, a single trustee can be appointed to make sure things stay on track while the business owner continues to operate as normal.

“The SBRA ensures that small businesses will be able to reorganize and rehabilitate their financial affairs effectively under the Bankruptcy Code,” Samuel J. Gerdano, the executive director of the American Bankruptcy Institute said in a statement at the time of the bill’s passing.

Dealing with creditors will be easier too.

Going forward, business owners will no longer have to get approval from creditors to move forward with a reorganization plan, as long as the court approves. The plan will rely on fewer factors, most importantly a three to five-year projection of disposable income that will show how debts will be paid off.

There’s also a new way for determining the owners’ and creditors equity interests, based on what is “fair and equitable,” with greater opportunities for owners to keep a stake in their businesses, even if all debts can’t be paid off. Certain personal assets — like homes and residences — are also now protected.

“While it is my hope small business owners will never need to use the provisions of this bill, I am pleased that they now will have the necessary resources to make successful the businesses that they have worked so hard to build,” Congressman Ben Cline (R-Virginia), one of the creators of the bill, said in a statement.

Of course, no small business owner wants to fail and regardless of how you spin it, bankruptcy is a failure. But given the chance to take a breath and reorganize, some of those businesses can potentially re-emerge and grow again. Before last week, that road was a lot tougher. Now, not as much.

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