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Consolidated Appropriations Act Provides Relief for Small Business Via Chapter 11

December 29, 2020

With the passage of the new Consolidated Appropriations Act of 2021 (the “Act”), many struggling but viable small businesses temporarily unable to pay rent can now file a Chapter 11 bankruptcy case, get four months of rent relief, and confirm a reorganization plan that allows payment of the arrearage over three to five years.  Here are the bankruptcy highlights from the Act:

  • Subchapter V small business debtors get an additional 60 days (for a total of 120 days) grace period to begin making rent payments. This, combined with the ability to pay post-petition rent arrearage over time in a plan, will give many small businesses temporarily unable to pay rent a safe harbor to reorganize.
  • Subchapter V small business debtors may pay post-petition rent arrearage through the life of their plan rather than in a lump sum prior to plan confirmation. This resolves an ambiguity in the Bankruptcy Code and overturns at least one bankruptcy court decision that held that rent arrearage could not be paid in a Subchapter V plan, a death blow to many small businesses that cannot afford to make a lump sum catch up payment.
  • Debtors get an additional 90 days (for a total of 210 days, with an additional 90-day extension) to make the election to assume or reject a lease. Many debtors have struggled with the current timing to make decisions regarding assumption or rejection of leases given the current uncertainty.
  • Landlords and creditors are protected from being sued to pay back payment made on account of pre-petition forbearance or other debt accommodation agreements. These payments could otherwise be deemed to have been made “outside of the ordinary course of business” and therefore recoverable by the estate.
  • While the Act contains several potential amendments that would allow small businesses and family farmers in bankruptcy to obtain PPP loans, those provisions will only go into effect in the sole discretion of the SBA Administrator. Therefore, the current split of authority regarding a debtor’s eligibility under PPP was not resolved by the Act.
  • The Act also contains numerous other changes related to individual debtors, family farmers, fishermen, landlords and creditors.

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