Frequently Asked Questions.
What types of businesses qualify for the Small Business Reorganization Act?
Essentially all businesses including the most common forms, Corporations, Sole Proprietorship’s, LLCs, Partnerships and Limited Partnerships.
What happens to pending lawsuits and other collection efforts once the case is filed?
All collection activities must stop including further prosecution of any lawsuit.
Why is the Small Business Reorganization Act such a game changer?
Because it allows an owner to maintain ownership of the company and wipe out or reduce unsecured debt in exchange for only contributing left over income for 36 to 60 months. Under the SBRA, owners retain possession, control and ownership even if unsecured creditors are not paid in full so long as the unsecured creditors receive their share of the remainder of business income after the payment of business expenses and the personal expenses of its owners.
Is there any way to enjoy the benefits of the SBRA without having to file a bankruptcy petition?
What is an example of how much a secured creditor gets paid?
Assume the following: balance on equipment purchase agreement $200,000. Equipment worth $50,000. Terms of purchase agreement: monthly payments at 18% interest. In a Reorganization Plan, the amount owed is reduced to $50,000 at 6% interest.
How does the business immediately return to profitability?
The business returns to profitability because debt payments cease upon filing the case. This, in turn, means income exceeds expenses. Once the new amounts owed are calculated, the final Reorganization Plan keeps the company profitable by structuring repayment terms so business income continues to exceed business expenses.
What will be the impact of the Small Business Reorganization Act?
In our opinion, tools available under the SBRA mean at least half of the businesses that before the SBRA would have failed will now return to profitability.
In a nutshell, what does a Reorganization Plan look like and how does it function?
- The amount owed on secured debt is reduced to the value of the equipment or other secured property.
- Back taxes and other “priority” debts are paid over 5 years unless the creditor agrees to a longer time.
- Unsecured debt (credit cards and other unsecured loans) are paid their share of the left over income pursuant to the following formula: gross business income – business expenses – monies needed for the personal expenses of the owner or owners = amount divided amongst the unsecured creditors.
- Professional fees are paid over 12 to 36 months as part of the plan payment.
- Items 1 through 4 are paid to a court appointed trustee once per month unless the Reorganization Plan is “consensual” in which case the debtor makes the payments directly.
What happens to a lawsuit against the company once the SBRA action is filed?
A lawsuit is stayed which means the complaint need not be answered and no further action take place in the state or federal court where that lawsuit has been filed. The debt that is the subject of a lawsuit is addressed in the Reorganization Plan. If the lawsuit concerns an unsecured debt, that creditor becomes a part of the pool of unsecured creditors who share pro rata in the remainder income as described above. If the lawsuit was brought by a secured creditor, the creditor receives the value of the property and is paid in accordance with the terms of the plan.
How long does it take between the time the cases filed in court confirmation of the Reorganization Plan?
4 to 6 months.
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