By: Donald L Swanson
The Small Business Reorganization Act of 2019 has the following discharge provisions:
- Plan confirmation “discharges the debtor from” specified debts (see § 1181(c), § 1192 & § 1141(d)(1)(A)); but
- The discharge takes effect only “after completion” of “all payments due within” the 3 to 5 years term of the plan (§ 1192). [Fn. 1].
This is the same discharge rule that applies in consumer cases under Chapter 13. The discharge rule for other Chapter 11 cases, by contrast, is this: discharge takes effect immediately upon confirmation of the plan (§ 1141(d)).
A Really-Bad Decision
Unfortunately, Congress decided to impose the consumer discharge rule on small businesses, instead of the business discharge rule. And it did so without even incorporating the consumer’s hardship discharge provisions of § 1328(b).
This is a really-bad decision. I’ll try to explain.
Back in 2005, Congress decided that consumers had it too easy in bankruptcy. Consumers were getting solicitations in the mail nearly every day to sign up for credit cards with high interest rates. And if consumers could get credit that easily, the poor credit card companies needed extra protection.
Congress provided that extra protection in 2005 by passing a law it called the “Bankruptcy Abuse Prevention and Consumer Protection Act.” This is a bizarre name because the Act has nothing to do with “consumer protection” and everything to do with punishing consumers who have too much debt.
Back in 1996, one million consumers filed bankruptcy in the United States. Congress presumed those debtors were acting abusively and with sin in their hearts. So, at the urging of credit card companies and other lenders, Congress decided to apply brakes to consumer bankruptcy.
The Bankruptcy Abuse Prevention and Consumer Protection Act (aka “BAPCPA”) is the brakes Congress decided to apply. BAPCPA contains many details that hinder and prevent consumer bankruptcy relief—especially for consumers in the middle class.
Such details have enabled credit card companies to continue soliciting high interest loans from nearly everyone, under the protection of tough bankruptcy laws for consumers
BAPCPA was a really bad idea. The title of BAPCPA should have been: “Consumer Abuse and Credit Card Protection Act.” A little truth in advertising would help.
–An Abusive Discharge Provision
One of the abusive provisions of BAPCPA is that debtors must submit all their “disposable income” to creditors for three to five years [translation: that means five, not three] before getting a discharge.
Think about it: for five years, a consumer is not able to put aside any savings . . . can’t even begin to create a nest egg. “No rainy day fund for you for five years—that’s your penance,” is the message of BAPCPA. Apparently, Congress prefers people on the public dole over effective bankruptcy relief.
Three to Five Years of Penance for Small Businesses
Congress is, apparently, in love with the three to five years penance they created in BAPCPA. They love it so much, they’re requiring it of small businesses as well. Under the Small Business Reorganization Act, a debtor can’t get a discharge until completing payments under a three to five years plan.
As with consumers, that means small businesses must pay all disposable income to creditors for the five years. They can’t create a nest egg or rainy day fund. They can’t even invest back into their business or try to grow it.
And consider this problem: to get a plan confirmed under the Small Business Reorganization Act, the business must repay the value of all assets being retained, plus professional and trustee fees, etc. That means, the debtor begins upon confirmation with a debt load exceeding its asset values. That’s a terrible situation and a recipe for failure. Moreover, the debtor must survive in that condition for three to five years, while making all plan payments, before getting a discharge—that’s also a recipe for failure.
Congress apparently wants to assure that small businesses FAIL in their reorganization efforts.
This is a really, really bad idea!
–A Poor Alternative
A small business may well be better off dealing with the absolute priority rule (see this linked article) and getting an immediate discharge upon plan confirmation, rather than paying the three to five-years penance as a small business.
The Small Business Reorganization Act of 2019 is a long-overdue and much-needed law. It comes, however, with a major flaw that needs to be corrected: the penance period before discharge needs to be eliminated.
Footnote 1. The operative discharge statutes under the Small Business Reorganization Act of 2019 are the following:
§ 1181. Inapplicability of other sections
. . .
(c) Special Rule for Discharge.—If a plan is confirmed under section 1191(b) of this title, section 1141(d) of this title shall not apply, except as provided in section 1192 of this title.
§ 1192. Discharge
If the plan of the debtor is confirmed under section 1191(b) of this title, as soon as practicable after completion by the debtor of all payments due within the first 3 years of the plan, or such longer period not to exceed 5 years as the court may fix, unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this chapter, the court shall grant the debtor a discharge of all debts provided in section 1141(d)(1)(A) of this title, and all other debts allowed under section 503 of this title and provided for in the plan, except any debt—
(1) on which the last payment is due after the first 3 years of the plan, or such other time not to exceed 5 years fixed by the court; or
(2) of the kind specified in section 523(a) of this title.
§ 1141(d)(1)(A) Effect of confirmation
. . .
(d) (1) Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan—
(A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title, whether or not—
(i) a proof of the claim based on such debt is filed or deemed filed under section 501 of this title;
(ii) such claim is allowed under section 502 of this title; or
(iii) the holder of such claim has accepted the plan;
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