A Chapter 11 Makeover: Timely Revisions to the Bankruptcy Code to Assist Small Businesses Through Crises

Rarely does Congress act proactively. But with the passage of the Small Business Reorganization Act (SBRA)[1] in 2019, the legislature may have—unknowingly at the time—saved many small businesses from the devastating economic effects of the coronavirus. For years, critics have bemoaned the Bankruptcy Code’s (Code) rigid framework for reorganizing financially distressed companies—specifically its one-size-fits-all treatment of the corner store and the Fortune 500 conglomerate.[2] Yet the SBRA attempted to streamline the lengthy and costly reorganization process, creating a fast-track path for small businesses in Chapter 11.

A Chapter 11 Makeover: Timely Revisions to the Bankruptcy Code to Assist Small Businesses Through Crises

Matthew J. Razzano*

I. Introduction

Rarely does Congress act proactively. But with the passage of the Small Business Reorganization Act (SBRA)[1] in 2019, the legislature may have—unknowingly at the time—saved many small businesses from the devastating economic effects of the coronavirus. For years, critics have bemoaned the Bankruptcy Code’s (Code) rigid framework for reorganizing financially distressed companies—specifically its one-size-fits-all treatment of the corner store and the Fortune 500 conglomerate.[2] Yet the SBRA attempted to streamline the lengthy and costly reorganization process, creating a fast-track path for small businesses in Chapter 11.[3]

This Essay argues that while Congress may have gotten lucky in amending the Code prior to a flood of pandemic-induced small business bankruptcies, Congress can make additional changes to better accommodate these struggling entrepreneurs. Part II discusses historical issues with the Code’s treatment of small businesses and the stress placed upon these owners during the coronavirus pandemic. Part III introduces the provisions of the SBRA. And Part IV addresses additional changes needed to holistically improve the bankruptcy system for small business owners.

II. Small Business Bankruptcy and Times of Stress

A. Background on Small Businesses and Chapter 11

The Code offers different frameworks for individuals and businesses to file for bankruptcy. Chapter 7 is used for those who want to liquidate their assets to pay creditors and start fresh.[4] Chapter 13 applies to individuals seeking to restructure their debt payments and create a plan to pay back creditors.[5] Chapter 11 includes provisions to shepherd businesses through the reorganization process, with the intention of creating a leaner, more viable company at the end of the proceedings.[6] This last filing can result in four actions—“dismissal, conversion to Chapter 7, liquidation by sale in Chapter 11, and [reorganization plan] confirmation.”[7] “Chapter 11 reorganization is held up as the alternative to liquidation, a solution that can put more dollars in the pockets of the creditors, save more jobs, and preserve local tax bases.”[8]

One of the major critiques of Chapter 11, however, is that its rules apply to businesses of all sizes—from the pizza shop at the end of the block to Lehman Brothers.[9] While the public likely recognizes major Chapter 11 cases like Toys “R” Us or the Detroit automakers, most filings in Chapter 11 are substantially smaller. For instance, in 1994, the median total debt of all reorganization cases was $643,490, and in 2002 it was $1.8 million.[10] As defined by the Code, a small business is classified as having debt less than approximately $2.7 million, so the majority of Chapter 11 cases are smaller businesses.[11] Moreover, in 2002 more than ninety-seven percent of business Chapter 7 filings—liquidation cases—involved businesses with less than $500,000 in debt.[12]

Another critique is that Chapter 11 cases are costly. A larger corporation is more likely to pay the legal fees associated with the process to see that the business has a successful reorganization. For instance,

Chapter 11 may be sufficiently complex that only companies with substantial resources can hire the professional talent needed to negotiate a successful plan. Larger companies may also have had bigger war chests to withstand the disruptions in supplies and other economic bumps that accompany a bankruptcy filing. Big companies may be more sophisticated about considering a Chapter 11 alternative, and they may have headed to Chapter 11 earlier, before the business had completely collapsed. Workout professionals are more likely to help big businesses, and they may be especially willing to recommend bankruptcy.” [13]

Larger companies have the means to hire lawyers and bankers to assist in the restructuring, whereas smaller businesses cannot afford it or might be unaware of the menu of options.[14] In addition, Chapter 11 cases often take months, if not years, and small businesses are unlikely to absorb the costs of operation throughout that period of uncertainty. The “median time spent in Chapter 11 is about eleven months.”[15] And only about thirty-three percent of cases are dispensed with in six months or less.[16]

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), partially with the intention of accelerating the bankruptcy process.[17] But the result was more muddled. BAPCPA required “new postpetition documentation, reporting, and related requirements, while, at the same time, it invite[d] early contests where the debtor [would] bear the burden of proving its reorganizational mettle.”[18] It also failed to provide any fundamental adjustments to the process to make it easier for small businesses.[19] The same problems persisted, and as a result, most small businesses still turned to Chapter 7 liquidation or state processes in times of economic distress.[20] Approximately “540,000 small businesses closed their doors during 2003, but only 34,000 (six percent) filed petitions under the [Code].”[21] Taking all this, the only conclusion we can draw from these consequences is that the Code has proven to be an unpopular option for distressed small businesses.

B. Small Businesses and the Outsized Strain During the Coronavirus Outbreak

Beyond the obviously grave public health concerns, the outbreak of COVID-19 in 2020 shuttered the global economy, limited travel, affected hospitality and tourism, and strained financial markets.[22] Yet small businesses have been even more gravely affected as city and state lockdowns force many to close their doors.[23] A variety of businesses have been touched by the virus. Most notably, the travel, airline, and hospitality industries have fallen in the wake of shelter-in-place ordinances and shut downs.[24] Industries that involve social activity among large groups, like movie theaters, have also suffered.[25] Surveys from various city businesses have suggested that many industries have considered wage cuts and layoffs because of these closures.[26] Restaurants and small retailers have been hit especially hard.[27] For instance, the New York City restaurant industry earns nearly $50 billion annually, but analysts already predict it will shrink severely.[28] Unfortunately, this distressing trend can be observed across most American cities. [29]

The federal government has stepped up, in unprecedented fashion, to support small businesses through various programs. For instance, the Small Business Administration (SBA) is offering businesses in affected sectors up to $2 million in loans with low interest rates.[30] In addition, various unemployment insurance programs have become more flexible, and the administration has also explored various loan forgiveness options.[31] Moreover, the federal government extended tax deadlines for individuals and businesses to July 2020.[32] But despite all of these measures, it is likely that many small businesses will struggle to recover even when some semblance of normalcy returns, and widespread bankruptcies will likely occur.

III. The Small Business Reorganization Act of 2019

Oddly enough, Congress acted with forethought in the summer of 2019 to address some concerns with the small business bankruptcy process. The SBRA passed the House[33] and the Senate easily, on voice votes with little fanfare and no partisan opposition.[34] Under the Code, businesses with debt less than about $2.7 million are eligible for this new subchapter V under Chapter 11.[35] Obviously, based on debt, a larger company could be eligible under certain circumstances, but debt here becomes a strong proxy for company size.

A welcome change is the replacement of the creditor committee with a trustee, more reminiscent of the Chapter 13 process.[36] Historically under Chapter 11, a creditor committee is created to vote on and confirm the debtor’s plan. Different debt categories and subordinate interests make confirmation complicated. But with the SBRA—knowing that small business bankruptcy is drastically less complex—a trustee is appointed in each case to manage and streamline the process.[37]  In traditional Chapter 11 cases, after a period of exclusivity where only the debtor can file a reorganization plan, creditors are able to create their own plans. At this stage, executing a successful reorganization becomes challenging, as creditors vie for larger shares of the finite debtor pool of capital.[38] Under the SBRA, however, only the debtor can file a plan—again expediting the process and incentivizing cooperation between debtor and creditors.[39]

Another significant change under the SBRA involves the avoidance of disclosure statements.[40] In previous Chapter 11 cases, companies would file this extensive report, detailing their financial and credit history in excruciating detail. This process made sense for large corporations with a variety of complex creditor relationships and convoluted balance sheets, but it drowned small business owners in paperwork—inflating the costs of the bankruptcy and disincentivizing small businesses from seeking refuge in Chapter 11. Under the SBRA, though, these companies are no longer required to file a disclosure statement. Some of the pertinent information is still required, but the burden is greatly reduced.

Other important features include court acceptance of the plan without creditor agreement and the ability of the owners to retain equity in the business.[41] This promotes cooperation and passes additional discretion to the court to find meaningful solutions to support small businesses. It also spreads administrative fees out across a longer period of time, allowing the Chapter 11 filing to proceed when the debtor may be at a low point financially.

These changes are a vast improvement from the one-size-fits-all Chapter 11 process of old. They move reorganization along with greater speed and efficiency so that small businesses can get back on their feet. In addition, the straightforward paperwork reduces costs for the debtor and makes Chapter 11 a more viable option. These changes come at an opportunistic time, when small business owners across the country might look for relief from the COVID-19-stalled economy. Despite these benefits, however, more maneuvering within the bankruptcy code can be done to cover the full range of small business owners and provide the best chances for a fresh start.

IV. Additional Changes to Assist Small Businesses in Bankruptcy

The SBRA streamlined many of the crucial pain points in Chapter 11 filings for small businesses, but it did not solve every issue. The most obvious question remains: what constitutes a small business? In business terms, $2.7 million in debt is not a substantial sum of money and, despite the benefits of this new provision, it might preclude many companies from filing. To bring more businesses into the fold, the CARES Act increased this limit to $7.5 million,[42] but further increases might be prudent—perhaps in the $10 million range. And perhaps these virus-induced changes should be made permanent.

The SBRA attempts to make bankruptcy easier to navigate for smaller, less complex companies. It is likely that the financial complexity of a company with $10 million in debt is more akin to a “small business” than a large conglomerate. Therefore, this new subchapter should welcome slightly larger entities. If this solution is not palatable, it might be worth waiving the disclosure statement requirement for $10 million companies to partially speed up the process and reduce costs. Other amendments to consider include limiting the provision that requires fifty percent of debt to arise from commercial transactions, in order to account for the wide variety of businesses that may leverage this subchapter, as well as limiting the fees of the appointed trustee.

Though this new subchapter directly addresses small business entities, it still might not be the best avenue for all small business owners to take when financially distressed. Chapter 13 is reserved for individuals, which means LLCs, partnerships, and other business structures must resort to Chapter 11 to reorganize their debts.[43] On the other hand, sole proprietorships may use Chapter 13 to reorganize personal and business debts—since the business and person are one and the same. Plenty of small businesses might prefer this less complicated path toward reorganization, as opposed to even the fast-track changes brought forth under the SBRA. For instance, many small restaurants struggling during the crisis might fall into this category, so it would benefit Congress to think about how to improve Chapter 13 to give these businesses a chance to reorganize instead of liquidate.

One of the most common criticisms[44] of BAPCPA was the strict means testing required to reach Chapter 7.[45] If an individual made more than the state’s median income, he or she was forced into Chapter 13, but this test often failed to consider factors that led to bankruptcy in the first place, such as job loss. In our case, a once successful business shuttered by the economic shutdown may be forced into Chapter 13, and compelled into a grueling repayment plan. Much has been written on the means test,[46] so it is not the focus of these solutions, but suffice it to say, it should be among the provisions considered for amendment.

Additionally, critics have long complained that BAPCPA increased the filing requirements and costs of bankruptcy, creating a windfall for attorneys. Congress should consider simplifying the paper trail to make it easier for small businesses to file for bankruptcy. The SBRA reduced the paperwork for small businesses by getting rid of the disclosure statement. Congress should look through Chapters 7 and 13 to further cut unnecessary filings and ease the costs of bankruptcy. Likewise, the SBRA included provisions to pay fees and attorney expenses over time instead of at the outset—a provision that cash-strapped businesses appreciate. Congress should look at doing the same for other bankruptcy provisions.

Finally, Congress should consider restructuring Chapter 13 to specifically make room for sole proprietorships. When individual debtors enter bankruptcy, it makes most of their assets, aside from a few exempt pieces of property, available to creditors. This creates a piecemeal bankruptcy system that allows debtors to file for discrete financial problems—e.g. for a home mortgage, while other assets are protected—could greatly expedite and improve the process. An additional subchapter could be aimed specifically at business debts for individual filers. Entrepreneurs who start restaurants and open small businesses take on enormous risks, with some statistics suggesting that only about seventy percent reach the second year.[47] Congress should not create a loophole to protect all their assets and incentivize riskier behavior, but in reality, individuals starting restaurants and small retail shops understand the stacked odds against them. They should not have to fear losing their homes, cars, and other belongings because of the unpredictable nature of the pandemic. With a new Chapter 13 subchapter, it is unlikely that there is a sudden rush to open new restaurants and shops, as one study has shown that bankruptcy abuse is less common than its detractors might suggest.[48] The Code should make it easier for these individuals to discharge their debts or provide creative solutions for them to repay debts and continue operating their businesses.

V. Conclusion

No one is advocating for additional bankruptcies, nor should Congress incentivize more filings. But fears that businesses will take advantage of the bankruptcy system have proven unfounded, as research confirms that this process is used for most people as a last resort and rarely abused. With that, bankruptcy should be simplified and easier to navigate. The pandemic has devastated the small business community, especially restaurants and small retailers, who have been forced to close to slow the spread of this deadly virus. Incidentally, Congress made changes to Chapter 11 in 2019 that will streamline the bankruptcy process for many of these small businesses affected, allowing them to reorganize and remain open. Still, to weather this storm and improve the Code, Congress should consider additional changes to accommodate these owners moving forward.


* Law Clerk, J.D., University of Notre Dame, 2019; M.Sc., London School of Economics, 2016; B.A., University of Notre Dame, 2012.

[1] Small Business Reorganization Act of 2019 (HR 3311), Pub. L. 116-54, 133 Stat. 1079 (Aug. 23, 2019)

[2] H.R. Rep. No. 116-171, at 2–4 (2019).

[3] Id.

[4] 11 U.S.C. §§ 701–784 (2018).

[5] Id. at §§ 1301–1330.

[6] Id. at §§ 1101–1195.

[7] Elizabeth Warren & Jay Lawrence Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 626 (2009). Before she was a presidential candidate, Elizabeth Warren took the novel approach in legal academic circles by placing an empirical lens on bankruptcy cases. See id. at 614.

[8] Id. at 612.

[9] See James B. Haines, Jr. & Philip J. Hendel, No Easy Answers: Small Business Bankruptcies After BAPCPA, 47 B.C. L. Rev. 71, 73 (2005).

[10] Warren & Westbrook, supra note 7 at 634.

[11] See 11 U.S.C. § 101(51D)(A) (2018).

[12] Warren & Westbrook, supra note 7 at 634.

[13] Warren & Westbrook, supra note 7 at 636–37.

[14] Haines, Jr. & Hendel, supra note 9 at 89 (“There is little incentive for an experienced bankruptcy boutique or large firm with a bankruptcy department to handle these matters. They are simply not economical.”).

[15] Warren & Westbrook, supra note 8 at 626.

[16]  Warren & Westbrook, supra note 8 at 628.

[17] See Bankruptcy Abuse Prevention and Consumer Protection Act, Pub. L. No. 109-8, 119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C).

[18] Haines, Jr. & Hendel, supra note 9 at 72.

[19] See Haines, Jr. & Hendel, supra note 9 at 72.

[20] Edward R. Morrison, Bargaining Around Bankruptcy: Small Business Workouts and State Law, 38 J. Legal Stud. 255, 255 (2009).

[21] Id.

[22] See Matt Apuzzo & Monika Pronczuk, Covid-19’s Economic Pain Is Universal. But Relief? Depends on Where You Live., N.Y. Times (Mar. 23, 2020), https://www.nytimes.com/2020/03/23/world/europe/coronavirus-economic-relief-wages.html [https://perma.cc/9WX6-JLBH].

[23] See Paul Davidson, It’s Not Just Restaurants and Movie Theaters Cutting Jobs. Small Business Layoffs Spread, USA Today (Mar. 24, 2020), https://www.usatoday.com/story/money/2020/03/24/coronavirus-marketing-data-firms-small-business-cut-jobs/2902286001/ [https://perma.cc/G7AE-T2T5].

[24] See Craig Karmin et al., Coronavirus Sends Travel Business and Millions It Employs Into All-Out Crisis, Wall St. J. (Mar. 17, 2020), https://www.wsj.com/articles/the-travel-business-and-the-millions-it-employs-confront-all-out-crisis-11584484867 [https://perma.cc/PG3W-WM4V].

[25] See Alex Sherman, Coronavirus could be the tipping point for movie theaters, gyms and other industries already suffering from disruption, CNBC (Mar. 16, 2020), https://www.cnbc.com/2020/03/16/coronavirus-will-most-hurt-industries-already-suffering-disruption.html [https://perma.cc/DC4B-MMAV].

[26] See Gracee Mattiace, Store and restaurant owners say COVID-19 quarantines hurting small business, 13KRCG (Mar. 19, 2020), https://krcgtv.com/news/coronavirus/store-and-restaurant-owners-say-covid-19-quarantines-hurting-small-business [https://perma.cc/63KP-CDZ3].

[27] See Austa Somvichian-Clausen, How NYC’s Restaurant Industry is Surviving Amid Coronavirus Crisis, Hill (Mar. 20, 2020), https://thehill.com/changing-america/respect/accessibility/488670-how-nycs-restaurant-industry-is-surviving-amid [https://perma.cc/W749-JQ68].

[28] See id.

[29] Jennifer Steinhauer & Pater Wells, As Restaurants Remain Shuttered, American Cities Fear the Future, N.Y. Times, (May 8, 2020), https://www.nytimes.com/2020/05/07/us/coronavirus-restaurants-closings.html [https://perma.cc/9U5R-HRV8].

[30] See Brianna McGurran, List Of Coronavirus (COVID-19) Small Business Relief Programs, Forbes (Mar. 20, 2020), https://www.forbes.com/sites/advisor/2020/03/20/list-of-coronavirus-covid-19-small-business-relief-programs/#bd3e8ae89dd0 [https://perma.cc/D6H3-NDHY].

[31] Press Release, White House, President Donald J. Trump Is Committed to Supporting Small Businesses Impacted by the Coronavirus (Mar. 23, 2020), https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-committed-supporting-small-businesses-impacted-coronavirus/ [https://perma.cc/JL7C-7X2K].

[32] Id.

[33] The SBRA was sponsored by Representatives Ben Cline (R-Va.), David Cicilline (D-R.I.), Doug Collins (R-Ga.), and Steve Cohen (D-Tenn.).

[34] See 165 Cong. Rec. H7220 (daily ed. July 23, 2019) (passing the House on a voice vote); 165 Cong. Rec. S5321 (daily ed. Aug. 1, 2019) (passing the Senate on a voice vote).

[35] 11 U.S.C. § 101(51D) (2018) (adjusted according to 11 U.S.C. § 104).

[36] 11 U.S.C. § 1302 (2018).

[37] Cf. Haines, Jr. & Hendel, supra note 9 at 72 (comparing a trustee in Chapter 11 to the process of Chapter 12 and 13).

[38] Cf. Haines, Jr. & Hendel, supra note 9 at 79 (“Under BAPCPA, statutory small business debtors are provided a 180-day exclusivity period, and are required to have filed the plan and disclosure statement within 300 days after entry of the order for relief. Both deadlines are subject to extension, but the debtor must obtain the extension by motion on notice and hearing.”).

[39] 11 U.S.C. § 1189(a) (2018).

[40] Id. at § 1187.

[41] Id. at § 1191.

[42] CARES Act, Pub. L. No. 116-136, § 1113 (2020).

[43] 11 U.S.C. § 1301–1330.

[44] See generally, David Gray Carlson, Means Testing: The Failed Bankruptcy Revolution of 2005, 15 Am. Bank. Inst. L. Rev. 223 (2007).

[45] 11 U.S.C. § 707.

[46] See, e.g., Katherine Porter & Deborah Thorne, The Failure of Bankruptcy’s Fresh Start, 92 Cornell L. Rev. 67, 118 (2006); see generally Roma Perez, Not “Special” Enough for Chapter 7: An Analysis of the Special Circumstances Provision of the Bankruptcy Code, 61 Cleveland St. L. Rev. 983 (2013).

[47] Small Business Facts, Small Bus. Admin.  (June 2012), https://www.sba.gov/sites/default/files/Business-Survival.pdf. [https://perma.cc/L9NS-CRYS]

[48] See Elizabeth Warren, The Bankruptcy Crisis, 73 Ind. L.J. 1079, 1098 (1998).