You may be considering filing bankruptcy potentially due to financial hardship or the COVID-19 pandemic. You are not alone. Commercial Chapter 11 filings increased in the first quarter of 2020 have been up according to the American Bankruptcy Institute, and the New York Times reported that small businesses may be stuck with debt if they relied on loan forgiveness.
Thankfully, small businesses have a new process for obtaining bankruptcy court relief when they sustain a financial hardship that prevents them from paying their debts. The Small Business Reorganization Act of 2019 (referred to in this article as “SBRA” or the “Act”) created a new Subchapter V within Chapter 11 of the Bankruptcy Code. President Trump signed the Act in 2018, which became effective on February 19, 2020. Subchapter V was created to help small businesses reorganize more efficiently and effectively under Chapter 11. The provisions of SBRA should make Chapter 11 proceedings less costly and quicker for small businesses.
According to the director of the United States Trustee Program, the SBRA reduces the cost of bankruptcy for small businesses making it easier for them to reorganize their debts to save their businesses.
Traditionally, Chapter 11 is a complex bankruptcy process that is reserved for large corporations and high-value individual cases. Even though the Bankruptcy Code treated a small business case differently in some ways, the process was still overwhelming, costly, and burdensome for many small business owners. Subchapter V aims to address those problems.
At a time when many small businesses are struggling because of the COVID-19 pandemic, the addition of Subchapter V to Chapter 11 may be the answer to many of the debt problems faced by small businesses in the upcoming months. You may want to consider reading the Chapter 11 Subchapter V process for further details about the process.
Individuals and small businesses may file for bankruptcy relief under Subchapter V. However, the debtor (the person or company filing bankruptcy) must engage in a commercial activity that is not a single-asset real estate business. At least one-half of the debtor’s liabilities must originate from business activity. Also, the debtor must meet the debt requirements for a Chapter 11 case under Subchapter V.
A debtor in Subchapter V must have less than $2,725,625 in non-contingent debt. This debt amount includes unsecured and secured debt, to qualify for bankruptcy relief under Subchapter V of Chapter 11. However, because of the economic impact of the coronavirus on our country’s small business owners, Congress increased the debt limits for Subchapter V. The amount increased to no more than $7,500,000 (excluding debts owed to 1 or more affiliates or insiders) not less than 50 percent of which arose from the commercial or business activities of the debtor) effective March 27, 2020, when it passed the CARES Act. It will revert back to the previous threshold after one year. You can find the exact language in Section 1113 in the CARES act.
There are requirements for the Subchapter V filing. For example, the debtor is required to file copies of federal tax returns, a statement of operations, a balance sheet, and cash flow statements.
Estimate Chapter 11 subchapter 5 qualifications using the subchapter 5 calculator below. Please note that this is an estimate that we continually refine.
A small business may spread out its debts over a three to five-year plan. This should give the small business time to recover from financial hardship. The business must devote future disposable income to repaying its creditors. The plan may include administrative expenses instead of requiring those expenses to be paid all at once.
Unlike a regular Chapter 11 case, the debtor can obtain confirmation of the plan without creditor approval (non-consensual plan). The plan cannot be unfair or inequitable. For example, creditors must receive at least as much as they would receive in a Chapter 7 liquidation through the proposed Subchapter V plan to obtain approval without creditor consent. For a consensual plan, the debtor receives a bankruptcy discharge when the plan is confirmed. In a non-consensual plan, the debtor receives a bankruptcy discharge after completing the plan. A Chapter 13 bankruptcy is often three or five years as well, so you may be wondering the differences between a Chapter 11 subchapter 5 and a Chapter 13 bankruptcy.
In a typical Chapter 11 case, a trustee may not be appointed. However, Subchapter V trustees are automatically appointed in Subchapter V cases. Even though the UST appoints a trustee to serve in the case, the debtor remains in control of the assets and operation of the business.
A Subchapter V trustee may investigate the debtor’s financial affairs, much like a Chapter 7 trustee. However, the primary role of a Subchapter V trustee is to act as a mediator between the debtor and its creditors. The trustee helps formulate a feasible bankruptcy repayment plan that is fair and equitable for the debtor and the creditors. Having an impartial party involved in the negotiations for a plan can help make the process quicker and more efficient.
If a small business owner pledged personal assets to secure business debt, the loan agreement might be modified in the Subchapter V plan. This provision could help protect some small business owners avoid some consequences that would typically make filing Chapter 11 undesirable.
The pace of a Subchapter V case is much faster than a typical Chapter 11 case. Typically, the court holds a status conference within 60 days of the filing of the case. The debtor must submit a written report at least two weeks before the status conference. For example, the debtor should detail the debtor’s efforts to negotiate a consensual plan with creditors.
To increase the speed in which a small business completes the bankruptcy process in Subchapter V, the debtor must file a plan of reorganization within 90 days after filing the bankruptcy petition. However, a judge may extend that deadline for reasons beyond the debtor’s control, such as difficulties caused by the COVID-19 outbreak. Only the debtor can file a plan in Subchapter V.
Debtors are not required to file disclosure statements in Subchapter V. This can speed up the process and relieve some of the requirements on a small business debtor.
There are additional provisions in the SBRA that might apply to some small business owners or debtors in Subchapter V. A Chapter 11 attorney can review the entire financial situation for a business or individual. The attorney will help determine if other provisions of the Act will be beneficial or unfavorable for the party.
COVID-19 has resulted in unexpected and unprecedented financial hardships for small business owners. Many small business owners face losing their company if they cannot find a way to hit “pause” on their debt obligations to recover from the financial results of the pandemic.
The new Chapter 11 bankruptcy process for small businesses under Subchapter V gives small business owners the “pause button” they need to recover and rebuild after reopening after the COVID-19 shutdown ends.
If you are interested in a less expensive, faster Chapter 11 bankruptcy case for small businesses, contact a bankruptcy attorney in your area. If you have questions or need assistance locating a Chapter 11 Subchapter V bankruptcy attorney, contact Ascend. Call or text us at 833-272-3631 to speak with a representative.