Bankruptcy Subchapter 5 Representation

Subchapter V Small Business Representation

The Small Business Reorganization (SBR) Act of 2019 added a new Subchapter V (Subchapter 5) under Chapter 11 of the United States Bankruptcy Code to give small businesses a faster, less burdensome, and less expensive option for reorganization. The law went into effect on February 19, 2020, and made Subchapter V bankruptcy available to businesses with less than $2,725,625 in aggregate secured and unsecured noncontingent and liquidated debt.

Shortly after the SBR Act went into effect, some of its Subchapter V provisions were amended by the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law March 28, 2020. The CARES Act expanded the number of businesses eligible for Subchapter V by increasing the debt limit to $7.5 million for one year. After one year, the debt limit will return to $2,725,625.

Filing for Chapter 11 bankruptcy often involves a lengthy process to modify or discharge business debt using a reorganization plan that has been approved by at least one class of impaired creditors and the Bankruptcy Court. Some small businesses found Chapter 11 proceedings were too difficult and expensive to serve as a practical tool for reorganization and either abandoned the idea of filing for bankruptcy or were forced to liquidate under Chapter 7.

The key benefits of Subchapter V bankruptcy include:

• Continued Ownership and Management. So long as unsecured creditors are paid using the debtor’s disposable income for a period of three to five years under a reorganization plan, equity holders will continue to own and manage the business. Disposable income is defined as income that is not needed to pay the expenses necessary to continue the debtor’s business operations.
• 90 Days to File a Plan. Debtors must file a plan no later than 90 days after entering bankruptcy unless a judge orders otherwise. Additionally, only the debtor may file a plan for reorganization.
• No Disclosure Statement. The disclosure statement that must be filed by most Chapter 11 debtors is not required in a Subchapter V bankruptcy unless ordered by the court for cause. A Chapter 11 disclosure statement usually includes such things as a brief history of the debtor’s business operations, a liquidation analysis, and projections regarding the debtor’s ability to make payments under the plan.
• No Creditors’ Committee. Under Subchapter V, no committee of creditors will be appointed unless ordered by the Bankruptcy Court.
• No Creditor Approval Needed. A reorganization plan can be confirmed without the vote of an impaired accepting class so long as the plan is deemed fair and equitable to each class of claims and does not discriminate unfairly.
• Delayed Payment of Administrative Expenses. In a traditional Chapter 11 case, administrative expense claims must be paid on the effective date of the reorganization plan, but a Subchapter V debtor may stretch those payments over the term of the plan.
• Specialized Trustee Appointed. The debtor continues to manage the business, but one or more Subchapter V trustees will be appointed to monitor the debtor’s affairs, evaluate the debtor’s assets, assess the debtor’s prospect for success, and offer recommendations regarding the confirmation of the debtor’s plan.

To elect Subchapter V bankruptcy, a debtor must qualify as a small business debtor engaged in commercial or business activities that have aggregate noncontingent liquidated secured and unsecured debt of not more than $7.5 million ($2,725,625 after March 27, 2021), excluding debts owed affiliates or insiders. At least 50% of that debt must be from the debtor’s commercial or business activities. Finally, the commercial or business activities of an eligible small business debtor include those of any affiliate but exclude any person whose primary activity is owning single-asset real estate.

Our attorneys at Thomas H. Curran Associates are ready to provide guidance and representation to businesses considering Subchapter V bankruptcy. Our attorneys are experienced in all forms of bankruptcy representation and will utilize that experience to successfully guide businesses through their Subchapter V bankruptcy proceedings.