Welcome to our post to help you learn about the Small Business Reorganization Act of 2019 (SBRA). We filed a Kentucky SBRA Chapter 11 Bankruptcy case in Louisville hours after the act went into effect. Under the SBRA, filing is supposed to be more simple than a normal Chapter 11. But SBRA cases move very quickly and you must file several motions at the start of the case.
SBRA cases have a monthly operating report just like you file in any other Chapter 11. Here is the form for the monthly operating report. At the end of this post is the checklist of document requirements that is a standard request at the start of the case from the Trustee.
The Debtor’s Ten Duties in a Kentucky SBRA Chapter 11 Bankruptcy
The SBRA was supposed to streamline the Chapter 11 filing but to someone who does not understand how complicated a Chapter 11 case is, it is still overwhelming. The judge seems to base his approval on whether or not the business has a positive cash flow to repay creditors. This requires a budget to decide if Chapter 11 business bankruptcy is feasible and profitable through reorganization. The budget is necessary to ensure the business is able to repay creditors without wasting assets.
Unless the business has a positive cash flow that can repay creditors it will be converted to a Chapter 7 liquidation bankruptcy. These decisions are base on your operating budget which must show a positive cash flow. Yes, you can reorganize, but the corporation or individual must also make enough profit while running their day-to-day business.
The following lists the 10 duties of the debtor in a Kentucky SBRA Chapter 11 Bankruptcy Case.
1. The duty to cooperate in a Kentucky SBRA Chapter 11.
There is both a panel trustee and the U.S. Trustee who have duties to supervise the case. The debtor in an SBRA Small Business Reorganization has specific duties under 11 U.S.C. § 521(a)(3). Of course, there is always a duty to cooperate because the debtor chooses to be in an 11 or Chapter 13. They are asking for the benefits of bankruptcy, so the debtor must cooperate.
2. The duty to comply with the four main deadlines of an SBRA Chapter 11.
The deadlines include an initial interview and a status conference within 60 days after filing under 11 USC 1188(a)(3). Fourteen days before the status conference, the debtor must report the efforts they have taken to attain a consensual plan of reorganization 11 USC 1188(c). Then, ninety days after filing the debtor must file a plan 11 USC 1189(b). These are the primary important deadlines pre-confirmation of the plan but there are other deadlines including the monthly reports. To see a more complete list check out our Kentucky SBRA checklist.
3. The duty to file a small business budget that can be approved.
The income the Debtor earns after the commencement of the case is property of the bankruptcy estate which is controlled by the Trustee and the Debtor in possession 11 USC 1115 (a) (2). To operate the business, the Debtor must file a motion with proper notice and a hearing before paying wages and expenses 11 USC 363(b)(1). If a property is used without authorization, the case may be converted to a Chapter 7, dismissed or a trustee may be appointed to manage the property directly by the US Trustee.
4. The duty to file SBRA periodic controlling interest reports.
There is also a duty to provide periodic operating reports on the value, operations, and profitability of the business or entity when you have over 20% ownership interest in a business. Periodic reporting is required under Fed R Bankr. P. 2015.3 and the reporting is on Form 426. The report is due seven days before the first date set for the meeting of creditors and semi-annually thereafter.
5. The duty to file SBRA monthly and quarterly reports.
Each month the Debtor must file a monthly operating report and no later than 20 days after the month being reported on. This is reported on form 425C along with any supporting documentation and exhibits. Post confirmation reports are not required though for an SBRA due to Bankruptcy Rule 2015(a)(5)
6. The duty to attend an SBRA initial debtor interview (IDI) within ten days of filing the petition.
In every SBRA case, the US Trustee schedules an IDI with the attorney and the Debtor. Normally, it’s held at the place of business but it can be held at the U.S. Trustees office at the trustee’s discretion. At the IDI the Debtor must provide any requested documentation in PDF format at least two days before the IDI interview. See the letter requiring documentation for this meeting at the bottom of this post for a very small company.
7. The duty to provide proof of insurance at least 7 days prior to the IDI initial interview.
The debtor is required to provide proof of insurance no later than three days after the case is filed with a loss payable to “[Debtor], the debtor in possession” with the United States Trustee listed as a party to be notified of any change, cancellation or expiration of each policy. The debtor in possession must also maintain insurance for all the tangible assets in addition to worker’s compensation and a general liability insurance policy. If normally in use, the debtor must also maintain industry product liability or professional liability insurance.
8. The duty to file and pay taxes under SBRA Chapter 11.
The Debtor has to file and pay taxes on time. Not filing and not paying taxes on time is a basis for dismissal of the case and the gross income is the income of the estate. Under 26 USC 1398 e, this can create tax problems and a debtor must get advice from a tax professional.
9. The duty to close old bank accounts and open new bank accounts at an authorized bank.
The District keeps a list of authorized banks. The new bank account cards must indicate the debtor is a “Chapter 11 Debtor in Possession”. All the checks for the company must note the debtor is a “Debtor in Possession” and contain the case number on the face of the check. The debtor in possession is responsible for ensuring all monies of the estate are reasonably and adequately protected. 11 U.S.C. § 345.
10. The duty to keep and maintain books and records.
The company is required to close its books and records upon the date of filing and to start new books and records. Furthermore, the debtor has to account for pre and post-petition accounts receivables and payable in all reporting.
The United States Trustee has administrative oversight duties in Chapter 11 bankruptcy cases pursuant to Title 11 U.S.C. §586.
Here are the documents and instructions to assist the attorney and their client in meeting the fast timelines under sub chapter V. Those documents and instructions include the following:
- Operating Guidelines that explain some of the basic obligations of a Debtor in Possession (“DIP”) in a chapter 11 case.
- You must file the Small Business part Monthly Operating Report (“MOR”) with the court each month while the case is open, including an income and expense spreadsheet.
- The current list of Authorized Depositories for post-petition banking. Please review these documents with your client to ensure prompt completion and compliance.
⎆ This is the checklist of initial documentation requirements.
If the debtor chooses to file under the provisions of sub chapter V, time is of the essence. Moreover, the sub chapter V Trustee involves themselves at all stages of this case. Upon receipt of an e-mail from the US Trustee, the Debtor must take the following actions:
- Acknowledge receipt of the e-mail from the US Trustee who requests these documents.
- Call the Chapter 11 attorney as soon as possible to discuss the case and schedule the Initial Debtor Interview (“IDI”). This must be held within 10 days of the filing of the petition.
- Review the attached documents with the Debtor.
- Provide immediately, via e-mail, the following documents:
a. Bank account statements for the 12 months prior to the bankruptcy filing.
b. A voided check from each Debtor in Possession checking account with “Debtor in Possession” and the case number on the check heading (temporary checks not acceptable).
c. Three (3) most recently filed federal income tax returns with all attachments.
d. Declaration page(s) from each insurance policy maintained by the debtor with the U.S. Trustee added as a certificate holder.
e. Most recent monthly Profit and Loss Statement (i) prepared by the Debtor, and (ii) externally prepared.
f. Most recent Balance Sheet (i) prepared by the Debtor, and (ii) externally prepared.
g. Cash disbursement ledgers (in .xls or .txt format) for the 12 months prior to a bankruptcy filing.
h. Minutes of any board of directors meetings held in the 12 months prior to a bankruptcy filing.
⎆ Organizing and labeling the documents correctly.
You must also organize and label the documents to correspond to the categories in the request for documents. The IDI normally takes place at the Debtor’s principal place of business prior to the §341 meetings of creditors. However, you may also conduct the IDI by telephone, or at our office. Please note that this depends on the nature of the case, and it is at the discretion of the US Trustee.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms
Other Related Information
Tax and Bankruptcy Lawyer for Business Trust and Income Tax • Video
Kentucky SBRA Small Business Bankruptcy Checklist
Budgets for Chapter 7 & 13 Bankruptcy
Tax and Bankruptcy Lawyer for Business Trust and Income Tax
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.
