The Small Business Reorganization Act, which was passed in August of 2019, adds a new section to the bankruptcy code under Chapter 11. Chapter 11, which is available for both businesses and individuals, is considered the most expensive and complex chapter of bankruptcy to file under. Businesses are required to file under Chapter 11 or face liquidation. In this article, we’ll discuss how the new section streamlines the Chapter 11 bankruptcy process and makes small business bankruptcy more affordable.
The New Bankruptcy Option for Small Businesses
The Small Business Reorganization Act allows businesses within a certain threshold of debt to expedite the bankruptcy process, cut some of the corners typically required of debtor companies, and reduce costs related to Chapter 11.
Traditionally, Chapter 11 has been utilized mostly by large corporations in a difficult debt situation. The costs related to administrative fees needed to be paid upfront, and the complexity of Chapter 11 cases cost more in legal fees as well.
Many small businesses that were facing debt struggles benefited not at all from an expensive bankruptcy filing leaving liquidation under Chapter 7 as the business’s last option.
Eligibility Requirements Under Subchapter V
To qualify under Subchapter V an entity must:
- Owe less than $2,725,625 (or $7.5M while pandemic protocols remain in effect)
- At least 50% of your debt must be related to “business activity”
- Your business does not derive the majority of its profits from a single real estate asset
Why Take Advantage of Subchapter V?
Subchapter V affords a struggling company a lifeline to remain in business while it manages its debt liabilities. It is, essentially, a “fast-pass” through the bankruptcy process. Businesses are assigned a trustee to oversee the bankruptcy, but unlike standard bankruptcy chapters, the trustee does not have to power sell off the business’s assets.
In contrast to a typical Chapter 11 filing, a Subchapter V filing moves much faster. Within 60 days of a Subchapter V filing, the court will hold a status hearing to determine what the debtor has done to satisfy their debts or stem their losses.
One of the major impediments to the Chapter 11 process is the disclosure requirement related to a business’s finances. It is during this phase of the bankruptcy that debtors and creditors squabble over the quality of the debtor’s disclosures.
In a Subchapter V filing, the debtor is only required to discuss their business operations, a liquidation analysis, and evidence that the debtor can make the proposed payments on time while remaining solvent.
Further, the plan doesn’t require the creditors to sign off on it. To confirm the plan, the court will need to believe that the debtor can make payments they agreed to and that the plan contains remedies if the debtor should default.
If the creditors agree to the plan (a consensual plan) the debtor will receive their discharge once the plan is confirmed. If the creditors do not agree to the plan, the debtor will get a discharge only after making all payments.
Understanding the Role of the Trustee
Most folks have never heard of Chapter 12 bankruptcy, but it’s a form of bankruptcy that is extended to family farmers. The role of the trustee in a Chapter 12 bankruptcy is significantly different than the role of a trustee in other forms of bankruptcy, but similar to the role of the trustee in Subchapter V.
Instead of being an agent who operates on the behalf of the creditors, the trustee facilitates the reaching of a consensual agreement that will satisfy all parties and ensure that the debtor is making timely payments to their creditors.
How Much Faster is Subchapter V than a Standard Chapter 11
Because there is no disclosure statement required, and no requirement for a creditors meeting, a small business may conclude their bankruptcy in a matter of months and as few as 90 days. If the creditors agree to the plan, the debtor receives a discharge once the plan is confirmed. So long as the debtor makes payments religiously over the next three or five years, they can gain a discharge even if the creditors do not consent to the reorganization plan.
A typical Chapter 11 bankruptcy may remain open for years before its resolved.
The Law Office of Jack Lezman Can Help Your Business Survive Economic Turmoil
The United States and the world have only begun to deal with the fallout from the COVID pandemic. Congress has thrown small businesses a lifeline by extending provisions set forth under The Small Business Reorganization Act. Subchapter V will help several small businesses survive the economic turmoil of this era. The Law Office of Jack Lezman, PLLC can help your business survive the unprecedented times.