On August 23, 2019, President Donald Trump signed into law the Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19, 2020, and sought to address issues small business debtors face when reorganizing under the provisions of the United States Bankruptcy Code. SBRA created a new Subchapter V to Chapter 11, which aimed to make it easier for small businesses to confirm plans of reorganization by expediting bankruptcy procedures.
Prior to the Act, many provisions made it difficult for small business and individual debtors to confirm a Chapter 11 plan of reorganization. Previous attempts to create an expedited process for small businesses to reorganize under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) were insufficient and some of its provisions were intended to expedite the process not necessarily on behalf of the debtor, but to prevent debtor abuse of the bankruptcy process. However, in 2019 Congress came to the rescue of small business and individual debtors through the passage of the SBRA which allows small-business debtors who have secured and unsecured business debts of less than $2,725,625 and are “engaged in commercial or business activities” to qualify for Subchapter V.
Under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was passed on an emergency basis in March 2020, in the early days of the Covid-19 pandemic, Congress increased the debt ceiling for a small business to file under Subchapter V to $7.5 million, currently under an extension ending March 27, 2022. SBRA, as enhanced by the CARES Act, was seen as not just a needed, expedited reorganization tool for small businesses but also as a method of dealing with the anticipated devastating effects of the Covid-19 pandemic and associated lockdowns and restrictions on the economy, and particularly on small businesses. https://businesslawtoday.org/2020/09/individual-chapter-11-cases-new-subchapter-v/
Subchapter V creates a new chapter within Chapter 11 to maintain the traditional Chapter 11 plan without the unnecessary procedural burdens and costs. One of the key aspects of Subchapter V is that it is designated only for the small business debtor, therefore only a debtor can file a plan of reorganization. Most notably, Subchapter V allows a small business owner to retain their equity in the business as long as the reorganization plan is fair and reasonable with respect to each class of claims or interests. To ensure this, the SBRA requires that the U.S. Trustee appoint a Subchapter V Trustee to every Subchapter V case to supervise the estate funds as well as clear the way for a mutual plan. https://en.wikipedia.org/wiki/Subchapter_V
Although there are many aspects of the new Subchapter V that are beneficial to a debtor, the most significant is the elimination of the Absolute Priority Rule – a rule governing the order and portion of payments with creditors and shareholders during a business liquidation. The new Subchapter V allows a debtor to confirm a plan over the objection of an unsecured creditor class as long as all “projected disposable income” of the debtor is received in a three-year period, or the value of the property to be distributed under the plan is not less than the “projected disposable income” of the debtor. https://businesslawtoday.org/2020/09/individual-chapter-11-cases-new-subchapter-v/
In this Web Site’s Section For Chapter 11 in General, there is a comparison of three (3) variations of Chapter 11: Standard Chapter 11 (“Standard-11”), Small Business Chapter 11 (“SB-11”) and Subchapter V Chapter 11 (“V-11”). Below there is is also comparison but it is more specific, a comparison of SB-11 and V-11, since both were meant as more efficient reorganization methods for small business.
There are a few conditions that must be met in order for a debtor to be eligible for Subchapter V relief.
1) First and foremost, debt must be incurred in connection with commercial or business operations. Not less than 50 percent of that debt must be from commercial or business activities.There are cases that have decided that V-11 is appropriate to a business wind down where the debtor was in business but is taking steps to close the business in an orderly manner.
2) Secondly, the debt ceiling of $7.5 million (which goes down to $2,725,625. after March 27, 2022) must be met.
3) Thirdly, for a debtor to proceed under Subchapter V, they must take part in a bankruptcy petition and bankruptcy process through the shareholder(s) and/or officer(s) with the authority to act on behalf of the debtor.
There is no doubt the current economic decline caused by COVID-19 has resulted in many debtors in need of bankruptcy protection. Thus, Subchapter V was enacted at an appropriate time. The higher debt limits under the CARES Act, and extensions, through March 27, 2022, will increase the number of individuals eligible for the new Subchapter V by providing small businesses a better chance to restructure debt and reorganize. The other advantages of Subchapter V in terms of more flexible and longer deadlines and reduced requirements and expenses mean that it may have been a well designed subchapter that may help small business debtors more extensively over time as debtor’s counsel, the Courts and the U.S. Trustee’s office all work to further their understanding of the mechanics of Subchapter V
The advantages to eligible businesses and individuals under Subchapter V are tremendous, particularly the elimination of the Absolute Priority Rule, making it considerably easier for individuals to confirm Chapter 11 plans. However, it’s always important to have a bankruptcy lawyer by your side to ensure the process goes smoothly. Our office has filled many Chapter 11 cases and has knowledge and expertise in these cases. The bankruptcy attorneys at The Law Office of Ronald D. Weiss, P.C. can assist you with filing for a Chapter 11 bankruptcy as well as help you get a better understanding of Subchapter V and all its benefits.
Our Law Office does not concentrate only in Chapter 11 bankruptcies, and we view both standard Chapter 11 cases and Subchapter V cases as useful tools in our pursuit of debt relief for our clients. Therefore we are able to have supplementary and alternative and backup options to Subchapter V in case it cannot deal with every aspect of our client’s financial hardship. That being said if we do decide to file a Subchapter V for your business we are dedicated to represent you in the case with knowledge and experience and will strive to achieve in the Subchapter V case the best results possible which can include a successful plan of reorganization and exit from the case after a confirmed plan of reorganization.
Please call the Law Office of Ronald D. Weiss P.C. at 631-271-3737 for a free consultation regarding Subchapter V.
Our legal consultations are free, but our advice may be invaluable.