On August 23, 2019, President Donald Trump signed into law the Small Business Reorganization Act of 2019 (“SBRA” or “the Act”), which became effective on February 19, 2020, and seeks to address issues small business debtors face when reorganizing under the provisions of the United States Bankruptcy Code. The Act creates a new Subchapter V to Chapter 11, which aims to make it easier for small businesses to confirm plans of reorganization by expediting bankruptcy procedures.
Prior to the Act, provisions made it difficult for debtors to confirm a Chapter 11 plan of reorganization. However, Congress came to the rescue of individual debtors through the passage of the SBRA which allows small-business debtors who have secured and unsecured business debts less than $2,725,625 and they are “engaged in commercial or business activities” to qualify for Subchapter V. Under the Coronavirus Aid, Relief and Economic Security act (CARES), Congress increased the debt ceiling for a small business to file under Subchapter V to $7.5 million, ending March 27, 2021. 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 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/
There are a few conditions that must be met in order for a debtor to be eligible for Subchapter V relief. First and foremost, debt must be incurred in connection with commercial or business operations. Secondly, the debt ceiling of $7.5 million must be met and not less than 50 percent of that debt must be from commercial or business activities. Additionally, for a debtor to proceed under Subchapter V, they must take part in a bankruptcy petition.
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 through March 27, 2021, 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 advantages to eligible 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. 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 and we view both regular Chapter 11 and Subchapter V 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.
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