Subchapter V of Chapter 11 of the Bankruptcy Code

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Subchapter V Lawyer – Small Business Chapter 11 Attorney

• History of Subchapter V
• Advantages of Subchapter V
• Other Advantages of Subchapter V to a Debtor Include:
• Comparison of Subchapter V Chapter 11 Case to Small Business Debtor Chapter 11 Case
• How is a Debtor Eligible for Subchapter V?
• The CARES Act Increases the Eligibility for Subchapter V
• Consult With a Bankruptcy Lawyer About Subchapter V
• Why Use Our Office to File a Subchapter V Case?

History of Subchapter V

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/

Advantages of 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/

Other Advantages of Subchapter V to a Debtor Include:

• Plan Exclusivity: Unlike a normal Chapter 11 bankruptcy case, there is no exclusivity period that expires after 120 days with Subchapter V. Furthermore, only the debtor may file a plan in Subchapter V

• Reduced Expenses: There are no U.S. Trustees’ fees in a Subchapter V case nor is a committee of creditors appointed in a Subchapter V case, thus reducing the administrative expenses to the debtor.

• Retention of Counsel Allowed: Generally, in a Chapter 11, the court will not approve retention of the debtor’s counsel without an application that the Court needs to review. However, Subchapter V has a special rule and allows retention of counsel as long as the debtor’s pre-petition fees do not exceed $10,000.

• Plan Modifications: In a Subchapter V, only the debtor may modify a plan. This is a substantial benefit because in a standard individual Chapter 11 case, Section 1127(e) permits the Trustee, the U.S. Trustee, or holders of an allowed unsecured claim to seek modifications, whether that is to increase the amount of plan payments or extend/reduce the time for payments.

• Possible Early Discharge: Subchapter V allows a debtor to obtain a discharge on the effective date of the plan as long as the plan was approved under Section 1191(a) – Confirmation of Plan.  

• Tighter Deadlines to Expedite the Process: A Subchapter V debtor has only 90 days to file a plan. This cuts in half the timing requirement for filing a plan in a typical Chapter 11 case. In addition to the 90-day file plan, the court will request a status conference within 60 days after the order of relief. The debtor must file a notice with the court two weeks prior to that status conference explaining their progress in confirming a consensual plan.  

• Remedies Upon Plan Default: The normal requirements under Chapter 11 do not require remedies to protect creditors. However, Section 1191(c) requires the plan to provide proper solutions to protect the holders of claims in interest in case the planned payments are not made.
  
• Trustee is a Business Person as Opposed to an Attorney or from the U.S. Trustee’s Office: The Trustee appointed to oversee the Subchapter V case is selected from a group of local, private business persons as opposed to being chosen from a panel of private attorneys (as is true of Chapter 7 and 13 cases) or being a staff attorney at the U.S. Trustee’s Office (as is true in standard, non-Subchapter V Chapter 11 cases). This element introduces a potentially new dynamic into Subchapter V cases which is an understanding and an elevation of the importance of the business substance side of the case, as opposed to the present prioritization given to the technical compliance side of the case. This new business focused approach to trustee supervision would better identify businesses that can reorganize their finances and give such businesses more of a chance even if they may lag on some technical compliance issues.

Comparison of Subchapter V Chapter 11 Case to Small Business Debtor Chapter 11 Case

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.

How is a Debtor Eligible for Subchapter V?

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.

The CARES Act Increases the Eligibility for Subchapter V

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

Consult With a Bankruptcy Lawyer About 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.

Why Use Our Office to File a Subchapter V Case?

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.