Congress recently passed and the President signed into law the Small Business Reorganization Act of 2019. This Act will provide broader bankruptcy relief to individuals engaged in business with aggregate debts of $2,725,625 or less. This debt limit is subject to adjustment every three years.
Effective on February 19, 2020, qualifying individuals will be able to confirm Chapter 11 plans without satisfying the “absolute priority rule” which requires all classes of creditors to be paid in full before the debtor may retain property. To do so, a debtor must present a plan that allocates the debtor’s disposable income (income after support and other expenses) to payments to creditors for at least three years but no longer than five years. This approach incorporates aspects of Chapter 13 into Chapter 11 and will enable debtors to confirm Chapter 11 plans more easily.
Separately, the Act also provides some benefit to creditors by imposing a new standard upon trustees and debtors before they may seek recovery of allegedly preferential payments or transfers. This change, which will apply to all bankruptcy cases, requires a trustee or debtor to use “reasonable due diligence” to evaluate a recipient’s “known or reasonably known” defenses before initiating efforts to recover a payment or other transfer. The Act does not delineate the steps a trustee or debtor must take to satisfy this standard, so they remain to be developed by the courts.
For our clients and others dealing with insolvent parties, the Act will allow some individual debtors greater use of Chapter 11 plans to compromise debts while retaining their property. However, in all kinds of bankruptcy matters, creditors will gain an additional avenue for defense of preference claims. Should either circumstance arise, our attorneys are well qualified to provide advice and representation in insolvency proceedings.