The attempts to reduce incidences of the coronavirus, including Maryland’s “stay-at-home” orders, have been hard on many of the Maryland’s small businesses. As a result, many Baltimore and Ocean City small businesses owners are considering bankruptcy.
While bankruptcy is probably not a businessperson’s first desire; Maryland business owners, especially those considering declaring bankruptcy in Annapolis, Baltimore, Essex, Ocean City, Towson, White Marsh should be aware that earlier this year, Congress approved a law that makes it easier and cheaper for small businesses to restructure business debt while taking advantage of the nation’s bankruptcy laws.
The “Small Business Reorganization Act” (SBRA) went into effect in February 2020. It streamlines existing debt reorganization procedures for small businesses and provides tools to improve a small business’ ability to restructure. Legal experts say it’s also easier and cheaper to get court approval of a small business bankruptcy under the new law.
Business owners struggling with debt have two options under the nation’s bankruptcy rules.
A Chapter 7 bankruptcy is a liquidation of debts, which means that the business shuts down and the assets of the business, if any, are sold. The money resulting from the sale of the assets is distributed to creditors who must accept what they are given as payment in full for the debt owed. A Chapter 7 eliminates most or all of the debts for which the owner is liable.
The second option is Chapter 11, a reorganization of debt. A Chapter 11 allows business owners to continue to run the business while negotiating the amounts owed to creditors. In a Chapter 11, a debtor often pays less than the full amount owed over a period of several years.
However, completing a Chapter 11 bankruptcy hasn’t been easy for small businesses because the bankruptcy laws for businesses were designed to handle business reorganizations for multi-million companies. In response to this problem, Congress and the president approved the SBRA, that adds a new subchapter to the bankruptcy laws, called a “small business debtor reorganization.” The new rules address many of the difficulties small businesses said they experienced in Chapter 11 cases.
The recently enacted law got rid of one of the biggest stumbling blocks to a small business debtor successfully completing bankruptcy – the need for at least one group of impaired creditors, those who will receive less than the full value of their claim, to accept the new payment plan. Before the law was put into place, a debtor could not get a plan confirmed unless at least one impaired class of creditors voted to accept the plan. This requirement alone made many Chapter 11 plans impossible to get through the bankruptcy system. Congress realized this was a huge stumbling block for small businesses and eliminated the need for creditor approval. Now, a repayment plan can be confirmed with no need for creditor votes.
The cost of obtaining a Chapter 11 bankruptcy for small businesses has been reduced under the new law because disclosure statements are no longer required.
Another change involves cramdowns. Debtors are allowed to modify a lien on a principal residence — which they could not do before — as long as the value received for the lien was not used to acquire the residence. For example, if have a house that’s been paid off and you need working capital for your business so you decide to mortgage your house and all the money is used for your business, then if you file Chapter 11, you will be able to modify the lien on your primary residence.
There is a financial requirement. Under the new rule, small businesses and individuals whose debts are business-related and that do not exceed $2,725,625 can start the process for bankruptcy relief.
The Law Office of Thomas J. Maronick is open during the pandemic and will continue to meet your Annapolis, Baltimore, Essex, Ocean City, Towson, White Marsh bankruptcy needs. A Baltimore bankruptcy attorney can help you to determine the best way to get out of debt and out from under creditor calls. An Ocean City bankruptcy attorney can devise a strategy for you that allows you to use the bankruptcy laws to your advantage. The consultation is free.
We can meet with you remotely if you have access to Zoom. You can contact Thomas Maronick on his cellphone at 202.288.0167, the law office at 410.885.1775 or through the website for a free consultation.