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Perspectives

CARES Act, Small Business Reorganization Act Give Treatment Centers Options

July 01, 2020

The widespread economic impact of COVID-19 has touched all industries, including addiction treatment and behavioral health providers. Cash flow interruptions have caused some providers to consider their options, including bankruptcy and restructuring. Recently American Addiction Centers (AAC), a publicly traded provider, filed for Chapter 11 bankruptcy protection. AAC acknowledged that, prior to COVID, the company was attempting to address its debt levels. However, the stay-at-home orders which many governments entered reduced inpatient admissions and outpatient visits, which prevented AAC from making debt payment.

Other providers may be wondering what options they have to manage their debts. There are bankruptcy and non-bankruptcy options to address debt demands. Additionally, the CARES Act expanded the options available to providers which qualify as “small businesses.”

The Small Business Reorganization Act was recently passed to help small businesses proceed quickly through Chapter 11 bankruptcy, obtain the benefits of Chapter 11 including the reduction and modification of debt, and avoid the high costs or administrative delays generally associated with Chapter 11. The CARES Act has expanded the number of businesses eligible to take advantage of the Small Business Reorganization Act. Individuals with business debt are also eligible, which may be helpful in the event a provider’s principals signed personal guarantees.

Certain benefits of the CARES Act which expand the Small Business Reorganization Act will expire if not renewed by Congress. Small businesses should consider their options promptly to avoid running against these deadlines.

Below is a summary of the Small Business Reorganization Act:

​​​Eligibility. A debtor must have non-contingent, liquidated debts (secured and unsecured) of no more than $2,725,625. Under the CARES Act, this limit has been increased to $7.5 million. The CARES Act amount expires one year from March 2020 passage.

Benefits

  • Lower costs. SBRA helps keep costs low by:
    • Eliminating the disclosure statement requirement.
    • Only the debtor may file a plan. There are no competing plans to litigate.
    • The debtor is no longer required to obtain votes if the plan otherwise complies with Bankruptcy Code. This too decreases the likelihood of costly litigation.
  • Bankruptcy tools
    • Assume or reject leases and contracts. This allows the company to terminate leases, cap damages and spread reduced payments over time.
    • Modify debt obligations by spreading out payments, discharging or both.
    • Sell assets “free and clear” to maximize their value.
  • Retain control
    • Absent bad acts, owners remain in control of operations during the bankruptcy case.
    • Owners retain ownership of the businesses post-bankruptcy by paying the company’s disposable income to creditors, generally at a discount, over a period of 3 to 5 years.
  • Fast-track cases
    • Court status conferences occur early to advance cases and establish a path forward.
    • The debtor must file a plan within 90 days of the bankruptcy filing.
    • A trustee is appointed to assist with creditor negotiations and advance a plan of reorganization.

The Small Business Reorganization Act came at the right time as businesses and individuals are experiencing unprecedented challenges. To avoid missing out on the increased benefits under the CARES Act, small businesses should learn their options before this program expires.

Thomas Zeichman is a bankruptcy and restructuring partner at Beighley, Myrick, Udell & Lynne P.A. Jeffrey C. Lynne is a land use and business regulation partner with the firm.

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