The Advantages of Subchapter V Small Business Bankruptcy

In the past, small businesses in dire financial straits did not have a lot of options in filing for bankruptcy. A Chapter 7 bankruptcy usually meant going out of business. A traditional Chapter 11 reorganization, involving significant costs and fees and stringent oversight, was usually too expensive and cumbersome for smaller companies. However, the passage of the Small Business Reorganization Act (SBRA) has afforded these companies a viable way to solve their debt problems and regain solvency.

Enacted in February 2020, the SBRA added a new provision to Chapter 11 making it more accessible to small businesses. The new section, known as Subchapter V, goes a long way toward streamlining the Chapter 11 process, reducing costs and removing many procedural and administrative hurdles.

Like a regular Chapter 11 bankruptcy, Subchapter V allows a business to restructure its debts and to pay off a portion of them over time through a court-approved plan. However, Subchapter V offers these practical advantages:

• There are no quarterly fees payable to the bankruptcy trustee.
• There is no unsecured creditors’ committee, which means the debtor avoids the usual costs of paying the committee’s legal counsel.
• Only the debtor can submit a plan. Creditors have no right to propose their own reorganization plan.
• The court can confirm the reorganization plan without creditor approval as long as the plan treats all creditors equitably.
• If all creditors agree to the plan, the company’s debt is discharged upon confirmation. If any creditor does not consent to the plan, then the debtor makes payments under the plan and receives a discharge once the payments are complete (typically three to five years).
• The company’s equity holders can retain their interests without investing new money and without needing to pay creditors in full.
• The debtor can pay off administrative costs as part of the repayment plan instead of paying them all upfront.

To utilize Subchapter V, a small business must meet these qualifications:

• It must be currently and principally engaged in business activity.
• The majority of its debt must be business-related, not an owner’s individual debt.
• The business must intend to reorganize and continue to operate after bankruptcy.
• The business’s debt must be less than the statutory debt limit.

When Subchapter V first went into effect, the debt limit was set at about $2.7 million. But soon after COVID-19 hit in early 2020, the CARES Act increased the limit to $7.5 million so more businesses affected by the virus could utilize Subchapter V. Though the limit is scheduled to revert to the initial $2.7 million amount on March 27, Congress could amend Subchapter V to extend the increased limit or to make it permanent.

The Law Office of Weiss, Schmidgall and Hires, P.C. has helped several Indiana small businesses successfully reorganize under Subchapter V and we’re ready to help you, too. Call our Merrillville firm at 219-293-8988 or contact us online to get a free consultation with a bankruptcy lawyer.

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