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Subchapter V: Chapter 11 Bankruptcy Reorganization for Small Businesses

Subchapter V: Chapter 11 Bankruptcy Reorganization for Small Businesses

October 19, 2020

Unnoticed by many small business owners, the Small Business Reorganization Act (SBRA) became effective in late February, 2020. The goal of the SBRA legislation was to provide certain small businesses with an option for bankruptcy reorganization tailored to the problems and limitations specific to smaller businesses. Shortly after the new law went into effect, of course, the COVID-19 pandemic hit the United States, with small businesses being especially impacted. Subchapter V is likely to be seen as a useful remedy for those businesses struggling to recover and survive the pandemic-related economic slowdown.

For the most part, Subchapter V filings are not yet being filed in large numbers in Kansas or Missouri, but they’ve started being filed by the hundreds on the east and west coasts. There have been a small number of Subchapter V filings locally thus far. Given the way things tend to travel to the heartland after landing on the coasts, however, the number of Subchapter V filings are likely to begin to increase close to home.

What is Subchapter V and why does it matter to bankruptcy creditors? Subchapter V is a subchapter of Chapter 11, so there are similarities to a typical Chapter 11. A few of the differences are:

  • Generally, a business debtor with non-contingent, secure, and unsecured debt less than $2,725,625 may elect Subchapter V treatment, unless that business derives substantially all of its income from operating a single real property then they are ineligible for Subchapter V. This amount was increased to $7,500,000.00 under the CARES Act.
  • A plan for reorganization generally must be filed within ninety (90) days of the bankruptcy petition, although that deadline can be extended in certain, strict circumstances. Only the debtor can file a plan, unlike in typical Chapter 11, where a creditor may file a plan. No disclosure statement must be filed with the plan. Instead, a Subchapter V debtor must only file a brief statement of the history of the business operations, a liquidation analysis, and projections that demonstrate the ability of the debtor to make the proposed payments.
  • Creditors must still receive as much under the plan as they would if the debtor were liquidated in Chapter 7.  Subchapter V also includes an option for the debtor to contribute all “projected disposable income” to making plan payments for three to five years, similar to a Chapter 13 plan. Subchapter V, like Chapter 12, does away with the “absolute priority rule” which means that, unlike a typical Chapter 11 case, the debtor can confirm a plan in Subchapter V over impaired, unsecured creditor’s objections and still allow owners to retain equity. There are some exceptions to this, but it is one of the greatest advantages of Subchapter V for the debtor and biggest differences to a typical Chapter 11 case.
  • To confirm the plan, the court must find (1) the debtor will be able to make all payments under the plan or (2) there is a reasonable likelihood that the debtor will be able to make all payments under the plan and the plan contains appropriate remedies to protect creditors if payments are not made as proposed.
  • To get to confirmation, a specially appointed Subchapter V trustee is appointed whose goal is to help the parties reach a consensual plan. Rather than acting in opposition to the debtor, which is the case in Chapter 7, the trustee’s role is more of a mediator trying to lead all parties to resolution. In fact, in some jurisdictions, the Subchapter V trustees are not licensed attorneys and instead have financial advisor or accounting backgrounds. A Chapter 11 trustee will only be appointed in the event one is sought for cause, such as for fraud, gross mismanagement, or to seize control of the debtor’s operations.
  • In most Subchapter V cases there will be no creditors’ committee.
  • Subchapter V allows debtors certain individual advantages to business owners. For example, a debtor may be able to restructure a business loan that is secured by his private residence.

In short, Subchapter V isn’t a new frontier but it does have distinct differences from Chapter 11 that creditors should be aware of. The bankruptcy attorneys at Martin Pringle will be monitoring new Subchapter V filings as they come about. If you have questions or need assistance as a creditor in a Subchapter V case, we are happy to assist.