The COVID-19 pandemic has heavily disrupted our lives, communities, and businesses. Even with new approaches, not all businesses can overcome the substantial challenges brought by the pandemic. Lending programs like the Paycheck Protection Program have brought temporary relief, but many small businesses remain exposed to financial difficulties and face a real risk of bankruptcy.

Small businesses considering bankruptcy protection should be aware of recent changes to the Bankruptcy Code enacted as the pandemic hit the United States and enhanced under the CARES Act. In February 2020, Congress enacted the Small Business Reorganization Act as Subchapter 5 of Chapter 11 of the Bankruptcy Code. It modifies the traditional bankruptcy process set out in Chapter 11 and reduces the cost and expense for small businesses to reorganize. Originally, the debt limit for a small business to qualify under Subchapter 5 was $2.7 million.

The CARES Act, enacted March 27, 2020, increased the debt limit for eligible businesses under the Small Business Reorganization Act from $2.7 million to $7.5 million, to allow more small businesses to take advantage of Subchapter 5. The increase in the debt limit is effective for one year after enactment of the CARES Act until March 27, 2021. Certain companies that previously filed under regular Chapter 11 have successfully been able to convert to cases under Subchapter 5.

Subchapter 5 (with the increased debt limit under the CARES Act) may provide many small businesses with a more attractive option for bankruptcy protection. Among other advantages, the provisions provide for a more streamlined confirmation process (generally without a disclosure statement), no requirement for creditors committees, and the ability to confirm a plan without needing to obtain approval by a class of impaired creditors or complying with the absolute priority rule, so long as the plan provides for the application of all projected disposable income over three to five years to payments under the plan. Thus, the Subchapter 5 process may offer a less costly form of bankruptcy relief, with the ability to retain equity, so long as the debtor dedicates all of their disposable income for three to five years to the payment of creditors. Subchapter 5 also provides for the involvement of a trustee in all cases, including to facilitate the development of a consensual plan of reorganization, but the trustees role is generally more limited than in typical trustee cases.

Many small businesses nearly 5 million nationwide received loans under the popular Paycheck Protection Program (PPP), also part of the CARES Act. If they are considering bankruptcy, PPP borrowers may have questions about the interaction of the PPP program and bankruptcy proceedings.

The issues facing small businesses today are unprecedented and complex. Traditional challenges interact with new programs, creating novel issues. It is important to consult counsel for assistance when navigating these challenges. Vinson & Elkins is monitoring the developments facing businesses during the pandemic and offers clients our cross-disciplinary approach to best resolve issues they face today.

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The Paycheck Protection Program And Bankruptcy | Vinson & Elkins LLP - JD Supra