New Subchapter V | Cheaper and More Streamlined Bankruptcy Reorganization for Small Businesses

On February 19, 2020, a new subchapter of the Bankruptcy Code went into effect geared specifically to help financially distressed small businesses. The Small Business Reorganization Act (SBRA) provides small businesses with a potentially cheaper and easier bankruptcy process compared to traditional Chapter 11 cases.

Many small businesses consult with bankruptcy attorneys with the hope of filing for Chapter 11 relief to restructure their debts, leases, or deal with lawsuits and judgments. Unfortunately, while Chapter 11 provides powerful tools and solutions for business, the cost of a Chapter 11 case is often unaffordable for a business operating with tight margins. SBRA, commonly known as Subchapter V, was created to provide small businesses with a more cost-effective and streamlined approach to Chapter 11 bankruptcy.

Subchapter V allows small businesses to pause their payments to creditors in order to negotiate with lenders, landlords, and other creditors and continue with their normal operations and generate income to pay both creditors and business expenses. The payments to creditors are often a fraction of what is owed, and payments may be made over months or years. Subchapter V provides new rules intended to make Chapter 11 more accessible and less expensive for small businesses.

Highlights of Subchapter V include:

• A Subchapter V debtor may pay its debt over 3 to 5 years as long as it devotes all of its projected disposable income to pay its creditors. Many businesses require both a discount and time to make any payment to creditors. Subchapter V provides both with payment plans between 3 and 5 years, allowing your business time to recover.

• Small businesses with debts under $7.5 million are qualified to file bankruptcy under Subchapter V. Congress has nearly tripled the debt-eligibility threshold from roughly $2.7 to $7.5 million in response to economic fallout from the COVID-19 shutdown.

• A Subchapter V debtor must file its plan of reorganization (payment plan to creditors) within 90 days after filing bankruptcy. This is designed to fast track bankruptcy for small businesses and encourage businesses to exit bankruptcy quickly, efficiently, and less expensively.

• A Subchapter V debtor is not required to file a disclosure statement. The disclosure statement is a lengthy document that describes a business’s chapter 11 payment plan and provides financial and historical information regarding the business. In a traditional Chapter case, preparation and approval of a disclosure statement is costly and time-consuming. By eliminating the requirement of a disclosure statement, businesses can expect to save costs related to their attorney’s fees in Chapter 11 bankruptcy.

• A Subchapter V debtor does not need a creditor to vote in favor of its payment plan. In a traditional Chapter 11 case, at least one class of creditors must vote in favor of a business’ plan in order to confirm the repayment plan. Often creditors want more than the company in bankruptcy case pay and therefore the case fails. Alternatively, creditors simply choose not to vote at all on the plan and thus debtors cannot secure the necessary votes. Subchapter V eliminates this requirement making it easier for small businesses to confirm their plans and exit bankruptcy.

• Subchapter V also eliminates the “New Value” Rule which requires equity holders (owners) to pay new value if they want to retain their ownership in the business. In a traditional bankruptcy case, if the unsecured creditors vote against the payment plan, the stockholders of the business must pay “new value” (funds from an outside source and not the business) in order to retain their stock. In Subchapter V, equity holders are no longer required to pay new value to retain their stock of the business, which will save money for business owners.

Given the relatively new implementation of Subchapter V, there are uncertainties with respect to the amount, if any, which will be saved, however, it is certain that Subchapter V provides businesses with powerful tools in resolving their financial issues.

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