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You may be a small business owner who is looking for assistance via the Chapter 11 Subchapter 5 to overcome a financial crisis. The Small Business Reorganization Act of 2019 (referred to in this article as “SBRA” or the “Act”), which became effective on February 19, 2020, streamlines the Chapter 11 process for small businesses. 

The Act creates a more efficient, effective, and affordable way for small business owners to save their businesses with the help of the bankruptcy courts. Before the addition of Chapter 11 Subchapter V, many small businesses could not afford to file a Chapter 11 bankruptcy case. The Chapter 11 process was too lengthy and costly. Now, small business owners have another option for seeking bankruptcy relief so that they can continue operating their company, keep their employees, and continue providing goods and services to their loyal customers. 

Chapter 11 Subchapter 5 Bankruptcy Process Overview

The following are steps involved in filing and completing a Chapter 11 Subchapter V case. All bankruptcy cases are unique. Therefore, you could encounter additional steps and requirements depending on the circumstances and facts relevant to your bankruptcy case and financial situation. 

Step One: Does Your Company Qualify for Subchapter V of Chapter 11?

Corporations, partnerships, and individuals can qualify to file under Subchapter V of Chapter 11. Single-asset real estate businesses are excluded from filing under Subchapter V. A minimum of one-half of the debt in the case must have originated from business activities. Chapter 11 Subchapter V has debt limits. A business must have less than $2,725,625 in non-contingent, liquidated debt (unsecured and secured) to qualify for Subchapter V treatment. 

However, Congress increased the debt limit in Subchapter V to $7,500,000 under the CARES Act. This increase in the debt limit is temporary (it is expected to expire in March 2021 unless extended further by Congress). 

Step Two: Decide Whether to Hire a Chapter 11 Attorney

Even though Subchapter V is designed to be a “fast pass” or streamlined Chapter 11 bankruptcy case, that does not mean that the Subchapter V process is not complicated. 

Chapter 11 cases are complex. They involve restructuring contracts, lease agreements, and other debts to allow the business to continue operating. The plans involve complex “cram downs” of liens that may exceed the value of the collateral. Creditors must be assigned to categories and treated differently depending on the type of debt that is owed to each category. 

If you are unfamiliar with the Chapter 11 process, you may want to consider consulting with a Chapter 11 bankruptcy attorney before proceeding with a bankruptcy filing. 

Step Three: Prepare and File Bankruptcy Petition and Bankruptcy Forms

You must prepare and file a bankruptcy petition, schedules, and statements. The Bankruptcy Petition is the same for all chapters of bankruptcy. You must choose Chapter 11 when completing the petition. You must also select the option that states you want to proceed under Subchapter V of Chapter 11. The filing fee for a Chapter 11 Subchapter V bankruptcy case is $1,717.

The remaining bankruptcy forms consist of schedules and statements that report your company’s assets, debts, income, expenses, and financial transactions. The forms must be accurate and complete. When you sign the forms, you state that the information is correct under penalty of perjury. When you file your bankruptcy petition, the clerk of court assigns a case number to your case. Notice of the bankruptcy filing is mailed to your creditors. 

NOTE: Chapter 11 debtors are required to file additional forms and reports that are not required in other chapters of bankruptcy. Debtors are required to file monthly operating reports, a list of 20 largest unsecured creditors, entity ownership reports, and other periodic financial reports. Some of these reports are ongoing and must be filed throughout the Subchapter V case.

Step Four: Assignment of Bankruptcy Trustee 

Unlike standard Chapter 11 cases, a trustee is appointed in every Subchapter V case. Subchapter V trustees are appointed by and supervised by the United States Trustee (UST) Office. The trustee’s primary role is to facilitate a consensual Chapter 11 plan between the debtor and the creditors. The trustee also has other duties under the Act, including but not limited to:

  • Examining proofs of claims and objecting to invalid claims;
  • Opposing the debtor’s discharge if grounds exist for denying discharge;
  • Take part in the Status Conference, 341 Meeting, and various hearings concerning the case;
  • Seizing control of the debtor’s assets and operate the company, if the debtor loses the right to do so; and,
  • Preparing and filing various reports, including a final report and accounting. 

As stated above, the primary duty of the trustee is to act as a mediator in assisting the debtor in developing a workable plan. Subchapter V trustees often have business experience and are an asset to the debtor.

Step Five: Attend Initial Debtor Interview, 341 First Meeting of Creditors, & Status Conference

Because a Subchapter V case is streamlined, the process is rapid. Within ten days after the case is filed, the UST’s office schedules an Initial Debtor Interview (IDI). The IDI is an opportunity for the UST to gain preliminary information about the debtor. The UST also uses the IDI to ensure that the debtor understands the responsibilities and requirements under Chapter 11, such as filing reports, setting up bank accounts, and using collateral or cash. 

The 341 Meeting of Creditor is held within 30 to 45 days after the filing of the case. The hearing is a public hearing at which the UST asks the debtor questions under oath about the debtor’s business and financial affairs. Creditors or their attorneys may appear to ask the debtor questions. The hearing can last for an hour or longer, depending on the complexity of the case and the status of the case. 

A mandatory Status Conference is also scheduled within the first 60 days of the case being filed. You must file a status report within 14 days before the Status Conference detailing your efforts to attain a consensual plan with your creditors. If you do not have a plan, the report should also include anticipated future efforts to obtain a consensual plan.

Step Six: File Chapter 11 Plan 

Unlike a general Chapter 11 case, only the debtor in a Subchapter V case is permitted to file a proposed plan of reorganization. Within 90 days of the filing of the bankruptcy case, the debtor must submit a proposed plan. Because the process is streamlined, a disclosure statement is not required. However, the plan must contain a brief history of the business operations, a liquidation analysis, and projections of the ability of the debtor to complete the plan. 

Subchapter V plans are for terms of three to five years. A debtor must contribute all projected disposable income to the bankruptcy plan. If the plan meets all requirements for a Subchapter V Chapter 11 plan, the court may grant a consensual confirmation. A consensual confirmation also requires that all impaired classes of creditors accept the plan. With a consensual plan, the debtor pays creditors directly, may be discharged, and the trustee’s services are terminated.

If a plan does not meet all requirements for a consensual plan, the court may approve the plan as a non-consensual plan. The court must find that the plan does not discriminate unfairly and that the plan is equitable and fair to impaired claims or interests. 

However, non-consensual plans change the Subchapter V process in several ways. For example, a discharge is not granted in a non-consensual plan until the debtor makes the last payment. The trustee, instead of the debtor, is responsible for disbursing payments under the plan. The trustee must file periodic and final reports and is not discharged until the case is complete. 

Chapter 11 Subchapter V Conclusion

Chapter 11 cases have a complex process, including cases under Subchapter V. The above overview is general. Chapter 11 Subchapter V has many requirements that a debtor must meet to remain in Chapter 11 and be successful in Chapter 11. 

We understand that you might have questions about Chapter 11 and bankruptcy cases in general. Please contact Ascend at 833-272-3631 to speak with someone about a Chapter 11 Subchapter 5 bankruptcy.

Post Author: Ben Tejes

Ben Tejes is a co-founder and CEO of Ascend Finance. Before Ascend, Ben held various executive roles at personal finance companies. Ben specializes in Chapter 13 Bankruptcy, Debt Settlement, Chapter 7 Bankruptcy and debt payoff methods. In his free time, Ben enjoys spending time going on adventures with his wife and three young daughters.

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