Main things to know about the Small Business Reorganization Act (SBRA)

Main things to know about the Small Business Reorganization Act (SBRA)

Chapter 11 bankruptcy is one of the most popular options for businesses to seek relief when they are struggling financially. But, it is often an expensive and cumbersome process, which dissuades small businesses from pursuing it.

That’s a main reason why Congress passed the Small Business Reorganization Act of 2019 — to make it easier for small businesses to file for bankruptcy protection. The streamlined process called Subchapter V is the main aspect of the SBRA, which is a manageable and cost-effective option for small businesses to pursue.

Below are some more details about the SBRA.

Best bankruptcy for your small business

The type of bankruptcy that you pursue for your small business will depend on not just the financial situation that you’re in, but how you want to manage your business after the process.

Chapter 7 bankruptcy, for instance, is known as “liquidation.” That’s because all property and assets are sold off under the oversight of a bankruptcy trustee, and those proceeds are dispersed to creditors. Once the bankruptcy proceedings end, the business will shut down.

Chapter 11 bankruptcy is known as “reorganization.” That’s because the process allows business owners to still operate while they work out a plan to meet all their debts. Chapter 11 is much more in-depth and expensive, though, but Subchapter V makes available a streamlined version of it.

Personal Bankruptcy for Small Business Owners

Small business owners who want to file personal bankruptcy have a few options. 

Chapter 13 bankruptcy is also known as a reorganization bankruptcy, but it’s intended just for individuals. Sole proprietors can use this tool, therefore, to help them reduce their personal debt, which could include balances on credit cards, so that their business can remain open.

Sole proprietors and individuals can also file Chapter 7 bankruptcy, which will erase their personal debts, though their personal assets that are not protected could be subject to be sold.

Continuing Your Business: Factors to Consider

Before you decide what type of bankruptcy to file, there are some factors that you should consider about continuing your business.

First, you should analyze whether your business is making money. If you are losing money consistently, then it might be best for you to close the doors rather than trying to operate after bankruptcy. If you are profitable, though, reorganization could be a great way for you to restructure.

Second, consider if the value of your assets are greater than your liabilities. If your assets are worth more than your liabilities, then it would be in your best interest to try to continue operating after bankruptcy.

Finally, consider if you might be personally liable for your business debts. If you are responsible for these debts, then it could make more sense for the business to continue operating. If you close it, after all, your personal assets could be at risk.

The SBRA (Small Business Reorganization Act)

The SBRA took effect on February 19 of 2020, right before the full outbreak of the COVID-19 pandemic in the U.S. This act created Subchapter V for Chapter 11 bankruptcy that streamlined the reorganization process for small business owners. 

Subchapter V is essentially an alternative that small business owners can use to pursue Chapter 11 bankruptcy. In essence, the SBRA seeks to strike a solid balance between the two most popular bankruptcy options — Chapter 11 and Chapter 7 — allowing businesses to continue operating while also having a quicker, cheaper and more streamlined option for figuring out their debts.

Pros and cons of Chapter 7 and Chapter 13 bankruptcy

There are many pros and cons of the different types of popular bankruptcies. 

Chapter 7 allows you to wipe away personal debts and basically start anew. It provides a fresh start to a lot of individuals who find themselves underwater with debt, allowing them to wipe away unsecured debt while still protecting significant assets such as homes and cars.

On the flip side, Chapter 7 bankruptcy from a small business standpoint means that the business will have to be liquidated to cover outstanding debts. Small businesses will close once the Chapter 7 bankruptcy proceedings end.

Chapter 13, meanwhile, allows the filer to keep some of the assets and property that they’d normally lose through Chapter 7. It allows business owners to reorganize their personal debts so that they can continue operating their business.

The downside is that Chapter 13 doesn’t include any business debts at all. In addition, it can be a rather expensive process.

Going to bankruptcy court as a small business owner

Bankruptcy court can be a daunting place for small business owners to go. That’s why any business owner who is considering filing for bankruptcy should enlist the services of an experienced bankruptcy law firm such as Babi Legal.

Chapter 7 Bankruptcy for a Sole Proprietorship

Sole proprietors can file for Chapter 7 bankruptcy, just as individuals may. This allows filers to erase both their personal and business debts. Any assets that they have — both personal and business — are subject to be sold if they’re not protected by certain exemptions.

The business might end up closing through this bankruptcy process if the bankruptcy trustee needs to sell property and assets to cover debts. 

What Happens When a Business Files for Bankruptcy?

What happens to a business when it files for bankruptcy depends on which type of bankruptcy is filed. Chapter 11 bankruptcy allows the company to continue to operate and reorganize rather than liquidate.

Chapter 7 small business bankruptcy

Under Chapter 7, the business will immediately cease operating and will go out of business. The company’s assets will be sold off to cover its debts. As mentioned, the debts will be completely wiped out, but the company won’t be able to operate afterward. 

Limited Liability Partnerships (LLP)

Members of a LLP can file Chapter 7 bankruptcy so that all business debts can be disposed. In most cases, partnerships won’t receive discharges through this type of bankruptcy. 

All of the assets under this bankruptcy for LLPs will be liquidated and then dispersed to all creditors. In most cases, if any partner is liable for the debts of the partnership, then their liability won’t suffer from the bankruptcy that the LLP files.

However, if the value of the LLPs assets aren’t sufficient to pay off all creditors, then the credits could be able to claim the partners’ personal assets are liable for the debt.

The downsides of bankruptcy

While there are many advantages to filing bankruptcy, there are also some downsides as well.

How does filing a business bankruptcy impact credit?

Filing Chapter 7 or Chapter 11 bankruptcy shouldn’t affect a business owner’s personal debt if they’re operating a corporation or LLC. There are exceptions to this, however, including if you’re personally liable for the debt.

Your small business credit might get impacted by a bankruptcy as well. Bankruptcies make up anywhere from about 5% to 10% of business credit scores, which shows how significant filing for bankruptcy can be.

At the same time, if you file personal bankruptcy, it could also affect the credit score of your business.

Can a Small Business Owner Benefit From Filing a Personal Chapter 13 Bankruptcy Case?

While businesses can’t file Chapter 13 bankruptcy, the business itself can benefit from an owner filing this type of personal bankruptcy. If a small business owner frees up cash through the Chapter 13 bankruptcy, then the small business could benefit substantially from the investments that could be made.