Another Result of COVID, Small Business Bankruptcies
Businesses of all sizes have been hit hard by the COVID pandemic with some industries hit harder than others. This will result in several businesses filing for bankruptcy. Some businesses will attempt to reorganize their debt in Chapter 11 while others face complete liquidation. But to avoid the potential impact on the economy, Congress passed a provision in February to make it easier and more cost-effective for small businesses to file under Chapter 11. Below, we’ll take a closer look at these provisions.
The Small Business Bankruptcy Reorganization Act (SBRA)
In anticipation of the economic devastation brought about by the COVID pandemic, Congress added a new subchapter to the Bankruptcy Code. “Subchapter V” was added in February to make the process of reorganizing under Chapter 11 cheaper and more efficient. When Congress passed The CARES Act shortly thereafter, they expanded the eligibility requirements to include more small businesses.
Chapter V Takes Less Time and Costs Less Than Chapter 11
Chapter V bankruptcies will become the preferred bankruptcy filing moving forward. Chapter V excels where Chapter 11 fails. Firstly, most Chapter 11 bankruptcies aren’t successful. The business never works its way out of debt and is eventually liquidated. Secondly, Chapter 11 bankruptcies are expensive largely because they take so long to resolve. In a traditional Chapter 11, it can take a year or more just to get a plan approved.
No Disclosure Statement Requirement
In a typical Chapter 11, the debtor has 120 days to submit a plan which is known as the “exclusivity period”. The debtor company must also issue a disclosure statement revealing details about the company’s finances.
In a Chapter V bankruptcy, the debtor has 90 days to submit the plan and does not require a disclosure statement. This expedites how quickly the bankruptcy can be approved.
Creditors Don’t Need to Sign Off to Confirm the Plan
Normally, at least one class of named creditors is required to sign off on the plan before the bankruptcy court approves the deal. In Chapter V, a debtor’s plan can be approved so long as it meets the requirements of the law without creditor support.
Real-Estate (Principal Residence) Secured Debts
A Chapter V filing allows debtors to alter the rights of a creditor who has a debt secured against the company’s residence so long as the lien was not placed on the building by the creditor for the purposes of securing a loan for the building itself. In other words, the debtor may alter the rights of a lien-holder on their residence but only if the lien isn’t related to the purchase of the building.
Administrative Fees Do Not Need to be Paid Up-Front
Typically, a debtor would be required to pay the administrative fees in full before their Chapter 11 is approved. This requirement is waived in Chapter V.
Debtors Can Protect Equity in Their Business
Chapter V allows debtors to protect their equity in their business if they agree to commit all of their projected disposable income to the payment of their creditors for at least three or at most five years.
A Standing Trustee
In typical Chapter 11 cases, a trustee is only appointed at the request of a creditor or the US Trustee. However, Chapter V cases have standing trustees that monitor every case.
Chapter V Eligibility Requirements
Originally, under Chapter 11, a debtor who had more than $2,725,625 in debt was not eligible. The CARES Act increased the debt limit to $7,500,000 so long as at least 50% of the debt is related to “commercial or business activities”. Contingent or unliquidated debts do not qualify. This provision is set to lapse on March 27, 2021.
The Bottom Line
Provisions of Chapter 11 Subchapter V of the Bankruptcy Code contain several debtor-friendly modifications for businesses with less than $7.5 million in debt. However, these provisions will lapse one year after their passage to prevent larger companies from enjoying the same protections as smaller ones.
If your business is struggling with the pandemic and is unlikely to be able to satisfy your debts, Chapter V offers a lifeline to keeping your employees and rebuilding for your future. The Law Office of Jack G. Lezman, PLLC can help you navigate the process of bankruptcy and ensure a future for you, your family, and your staff. Call today to learn more.