New Bankruptcy Laws Aim to Help Small Businesses, Family Farmers, and Veterans

President Trump signed four pieces of bankruptcy legislation into law on August 23, 2019: (1) the "Small Business Reorganization Act of 2019", (2) the "Family Farmer Relief Act of 2019," (3) the "Honoring American Veterans in Extreme Need Act of 2019", and (4) the "National Guard and Reservists Debt Relief Extension Act of 2019". In this article, we review the new laws and some of their possible effects.

Small Business Reorganization Act of 2019

The Small Business Reorganization Act of 2019 (the "SBRA") will become effective February 19, 2020. The SBRA applies to the "small business debtor," which is an individual or business entity whose total noncontingent, liquidated debts are no more than $2,725,625 and at least 50% comprised of debts that arose from business activity. Debts owed to affiliates or insiders do not count against the cap. Also, a "small business debtor" does not include a person or entity whose primary activity is owning "single asset real estate," which means, with some exceptions, a single real estate project on which the prospective debtor is not conducting any substantial business.

The SBRA aims to make small-business Chapter 11 cases more efficient, less costly, and more likely to succeed, and so in some ways those cases will be like Chapter 13 consumer cases. As in Chapter 13 cases -

1. The debtor will file a proposed reorganization plan that turns his projected disposable income (or property of equivalent value) over to creditors for a period of 3 to 5 years.
2. The case will be streamlined and move relatively quickly. The proposed plan will normally be filed within 90 days after the bankruptcy filing, and there will be no accompanying disclosure statement. Further, there will be no unsecured creditors committee (unless the bankruptcy court orders one for cause, which should be a rarity). Instead, a trustee will be appointed to, among other things, supervise the case and ensure the debtor makes the payments required by his plan.
3. The court can confirm the proposed plan even if (a) it is not accepted by at least one class of creditors, and (b) the individuals who own the business will retain their ownership notwithstanding that unsecured creditors will not be paid in full.

The SBRA also changes the normal rule in Chapter 11 to allow a debtor to modify a claim secured by his principal residence (e.g., to strip down the mortgage lien to the value of the property) if he granted the security interest in exchange for value that was "not used primarily to acquire the real property" and "used primarily in connection with the small business of the debtor." And as an added boon, unlike other Chapter 11 debtors, small business debtors will not have to pay quarterly fees to the U.S. Trustee (which oversees the bankruptcy system).

The SBRA seems well designed to achieve its goals. Chapter 11 is generally cumbersome and expensive, and to date that has undoubtedly dissuaded many small businesses from filing. As word spreads of the relatively quick, inexpensive, and simple process established by the SBRA, it is reasonable to expect to see a notable increase in Chapter 11 filings by small businesses. Further, it's certain that many debtors who would file Chapter 11 regardless of the SBRA will take advantage of the SBRA. The American Bankruptcy Institute has calculated that roughly 40% of the Chapter 11 cases filed from 2014 through 2018 would have qualified as "small business debtor" cases under the SBRA and that in almost three quarters of the federal judicial districts, more than fifty percent of the Chapter 11 cases would have qualified.

Finally, while the SBRA mostly aids debtors, it does help creditors with respect to "preference" lawsuits - i.e., lawsuits filed by debtors or bankruptcy trustees to claw back payments the debtor made to a creditor in the 90 days before the bankruptcy filing. First, the SBRA provides that before filing a preference lawsuit the debtor or trustee must engage in "reasonable due diligence" and take "into account a party's known or reasonably knowable affirmative defenses...." Second, preference cases for less than $25,000 are now usually going to have to be filed in the defendant's home district, instead of where the bankruptcy case is pending (the previous cutoff amount was $13,650). These changes reflect a growing wariness that preference cases are often filed based on a desire to extract a settlement from the defendant, instead of based on the merits.

Family Farmer Relief Act of 2019

The Family Farmer Relief Act of 2019 (the "FFRA") became effective when signed by the President. The FFRA raises the amount of debt that a family farmer can have and still file Chapter 12 bankruptcy from $4,411,400 to $10,000,000.

Chapter 12 bankruptcy is limited to family farmers and family fishermen. Note, however, that the Bankruptcy Code's definition of "family farmer" is complex and can include businesses that might not typically be considered "farming," such as timber-harvesting businesses and animal-breeding businesses. A key factor is whether the business is exposed to the risks traditionally associated with farming, such as drought and disease.

Chapter 12 was created in 1986 in response to the financial crisis many family farmers were experiencing at the time. Like the SBRA, Chapter 12 provides debtors with a streamlined process similar to a Chapter 13 case and with relief from some of the legal hurdles in Chapter 11 (such as the need to pay unsecured creditors in full in order for the business owners to retain their ownership interests).

The bipartisan sponsors of the FFRA in Congress noted that the Chapter 12 debt limit, even though it has been regularly adjusted for inflation, has not kept up with the increasing costs of running a family farm. They also pointed to current problems for farmers, such as low commodity prices and high debt levels, that are pushing up the rate of farm bankruptcy filings. In this regard, the American Bankruptcy Institute notes that there were 535 Chapter 12 filings in the twelve months ending June 30, 2019, which is up 13% over the previous twelve months.

By more than doubling the debt limit for Chapter 12, the FFRA likely makes bankruptcy a viable option for many more family farmers, and it is therefore reasonable to expect an increasing number of farm bankruptcies.

Honoring American Veterans in Extreme Need Act of 2019

The Honoring American Veterans in Extreme Need Act of 2019 (the "HAVEN Act") became effective when signed by the President on August 23. The HAVEN Act excludes military veterans' disability benefits from the Bankruptcy Code's definition of "current monthly income," meaning those benefits can no longer be taken into account in calculating (a) whether a debtor is eligible for a Chapter 7 liquidation instead of a Chapter 13 reorganization (i.e., repayment plan), or (b) how much income a debtor has available to repay creditors in a Chapter 13 case. The HAVEN Act brings the treatment of veterans' disability benefits into line with the treatment already accorded to benefits received under the Social Security Act and benefits received by victims or war crimes or terrorism.

National Guard and Reservists Debt Relief Extension Act of 2019

The National Guard and Reservists Debt Relief Extension Act of 2019 (the "Act") extends through December 18, 2023, a protection for certain members of the National Guard and Reserves that was first created in 2008. Under the Act, a member of the National Guard or Reserves who was on active duty or performing homeland defense activities for at least 90 days during the 540 days preceding his bankruptcy filing, is protected from having his Chapter 7 case dismissed or converted based on the Bankruptcy Code's financial "means test" for determining whether a debtor is eligible for a Chapter 7 liquidation instead of a Chapter 13 reorganization. Congress determined that the Act was necessary because members of the National Guard and Reserves are often paid more for active-duty service than they receive in their civilian jobs and, therefore, might face a harder road in bankruptcy court than their civilian counterparts.