The ongoing pandemic is crushing small businesses. For the lucky businesses that obtained PPP loans, EIDL, and state grant money, the true financial impact may have been delayed. For other less-fortunate businesses that did not receive such relief, the situation is dire.

Thankfully, there is a new-look Chapter 11 bankruptcy called Subchapter V specifically designed for small businesses that went into effect February 19, 2020. To qualify, the business must be “engaged in commercial or business activities” with total non-contingent liquidated secured and unsecured debt of less than $7.5 million. (The CARES Act increased the debt limit from $2,725,625 for a one-year period).

The Subchapter V Chapter 11 bankruptcy is supposed to support small businesses and provide a more cost-effective and efficient process to facilitate reorganization. The traditional Chapter 11 bankruptcy works pretty poorly for small businesses because it is expensive and overly burdensome. Also, small businesses are commonly privately owned “mom and pop” type businesses, meaning they’d like to retain control and ownership of the business. The traditional Chapter 11 bankruptcy makes that difficult if not impossible in most situations.

Key Features of Subchapter V

  1. Subchapter V Trustee. The Trustee is appointed in each case to serve the role as mediator, facilitator, and monitor of the case. This is a brand new role created just for the Subchapter V bankruptcy. I welcome the addition because the small business Debtor will benefit from the additional support.
  2. Debtor-in-Possession. The owner remains in control of the business. This is crucial to a small business because typically the business and the owner are quite frankly one-in-the-same.
  3. No Absolute Priority Rule. The owner retains ownership of the business. In a traditional Chapter 11 bankruptcy, the small business has to deal with the absolute priority rule, which is typically a hurdle they can’t overcome. With the elimination of the absolute priority rule, the Debtor has to commit disposable income to the plan to comply with the “cram down” provisions. This means that general unsecured creditors will most likely get paid pennies on the dollar and allow the owner to retain ownership, which is a big win for small businesses.
  4. Required Status Conference and Report. The Debtor has 60 days to hold a status conference and 14 days beforehand to file a report regarding efforts to obtain consensual plan. The goal of the Subchapter V is increased speed and efficiency that I hope leads to increased collaboration with creditors to give the small business a chance to reorganize.
  5. Only Debtor May File Plan. The Debtor doesn’t have to be looking over its shoulder wondering if a creditor/creditors committee will submit a competing plan.
  6. The Debtor has 90 days to file a plan. This is pretty quick as compared to maximum 300 days in a traditional Chapter 11. Once again, the quicker a plan can be confirmed, the less the Debtor spends on case administration.
  7. No Disclosure Statement. In a traditional Chapter 11, the Debtor must prepare and file a separate disclosure statement to accompany the plan. Reducing requirements reduces the cost of navigating the Subchapter V.
  8. No US Trustee Fees. Traditionally, the Debtor has to pay quarterly fees to the US Trustee’s Office based upon distributions that the Debtor makes during the course of the bankruptcy. For a small business where every dollar makes a difference in operating and reorganizing, these fees can be overly burdensome to the point where the Debtor has to forego an expense that would propel the business forward. Not having these fees frees up funds for the small business to operate and reorganize.
  9. Plan May Modify a Claim Secured Only by Debtor’s Principal Residence. If the funds of the debt secured by the primary residence were used for business purposes, the claim can be modified. This is a provision borrowed from Chapter 12 farm bankruptcies. This is a major benefit because the Debtor can remove the lien in part or in whole depending upon the value of the residence and the amounts of senior liens on the residence. The Debtor can also modify the interest rate
  10. Delayed Payment of Administrative Expense Claims.In a traditional Chapter 11, the Debtor must pay administrative expense claims as of the effective date or in the ordinary course of business, which can seriously impede cash flow. In the Subchapter V, the Debtor may spread out the payments of administrative expense claims over the duration of the plan, which ameliorates a cash flow crunch.

Instead of worrying what will come next, meet with a bankruptcy attorney to discover your options tailored to your situation.

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