Chapter 11 Subchapter 5: 6 Things To Know

Chapter 11 Subchapter 5: 6 Things To Know

If you're struggling financially due to the COVID-19 pandemic or other reasons, you may be considering filing for bankruptcy. You're not alone - according to the American Bankruptcy Institute, commercial Chapter 11 filings increased in the first quarter of 2020. Additionally, small businesses that relied on loan forgiveness may be left with debt, as reported by the New York Times.

However, there's good news for small businesses. The Small Business Reorganization Act of 2019, also known as the SBRA, created a new Subchapter V within Chapter 11 of the Bankruptcy Code. This new process allows small businesses to obtain bankruptcy court relief when they can't pay their debts due to financial hardship.

Subchapter V was specifically designed to help small businesses reorganize more efficiently and effectively under Chapter 11. The provisions of the SBRA should make Chapter 11 proceedings less costly and quicker for small businesses, reducing the cost of bankruptcy and making it easier for them to reorganize their debts and save their businesses.

The United States Trustee Program's director has praised the SBRA, stating that it's a game-changer for small businesses struggling with debt. If you're a small business owner facing financial hardship, the SBRA may be a helpful option for you to consider.

The goals of Chapter 11 Subchapter V include:

If you're a small business owner, you may have heard of Chapter 11 bankruptcy. However, it's a complex process that's typically reserved for large corporations and high-value individuals. But there's good news: Subchapter V has been added to Chapter 11 to make the process less overwhelming, costly, and burdensome for small businesses. Subchapter V offers a few key benefits for small businesses. First, it shortens the deadlines for completing the Chapter 11 process. Second, it gives small businesses more flexibility to restructure their debts with their creditors. And third, it provides private trustees who can assist small business debtors and their creditors in developing an agreeable plan of reorganization for the company. With many small businesses struggling due to the COVID-19 pandemic, Subchapter V may be the answer to their debt problems in the upcoming months. If you want to learn more about the Chapter 11 Subchapter V process, check out this helpful guide.

6 Things You Need to Know About Subchapter V and Small Business Chapter 11 Cases

1. Subchapter V Eligibility Requirements

If you're an individual or small business facing financial difficulties, filing for bankruptcy relief under Subchapter V may be an option worth considering. This type of bankruptcy is specifically designed for those who engage in commercial activity that isn't a single-asset real estate business.

But there are some requirements you need to meet. For instance, at least half of your liabilities must come from business activity. Additionally, you'll need to meet the debt requirements for a Chapter 11 case under Subchapter V. While it may seem daunting, filing for bankruptcy relief under Subchapter V can help you get back on your feet and move forward with your business.

2. There are Debt Limits for Qualifying for Subchapter V

If you're a small business owner struggling with debt, there's good news. You may be eligible for bankruptcy relief under Subchapter V of Chapter 11. To qualify, your non-contingent debt must be less than $2,725,625, including both secured and unsecured debt. However, due to the economic impact of COVID-19, Congress has temporarily increased the debt limits for Subchapter V. As of March 27, 2020, the new limit is $7,500,000 (excluding debts owed to affiliates or insiders) with at least 50% of the debt arising from business activities. This change will be in effect for one year and is outlined in Section 1113 of the CARES Act, which you can read here.

Keep in mind that there are certain requirements for filing under Subchapter V. For instance, you'll need to provide copies of your federal tax returns, a statement of operations, a balance sheet, and cash flow statements.

To get an idea of whether you qualify for Chapter 11 Subchapter V bankruptcy relief, you can use the calculator below. Please note that this is just an estimate, and your situation may be different.

3. Subchapter V Plans Extend for Three to Five Years

If a small business is struggling financially, it may be able to spread out its debts over a three to five-year plan. This gives the business time to recover without being overwhelmed by debt payments. The plan requires the business to use its future disposable income to pay back its creditors, and may include administrative expenses as well.

Unlike a regular Chapter 11 bankruptcy case, a debtor can confirm a plan without creditor approval in a non-consensual plan. However, the plan must be fair and equitable. For instance, the proposed Subchapter V plan must ensure that creditors receive at least as much as they would in a Chapter 7 liquidation to obtain approval without creditor consent. If the plan is consensual, the debtor receives a bankruptcy discharge upon confirmation. In a non-consensual plan, the debtor receives a discharge after completing the plan. A Chapter 13 bankruptcy is also three to five years long, so you may be wondering about the differences between a Chapter 11 Subchapter V and a Chapter 13 bankruptcy.

If you're considering bankruptcy, it's important to understand your options. Chapter 11 Subchapter V is designed specifically for small businesses, while Chapter 13 is for individuals. In a Chapter 13 bankruptcy, the debtor must pay back all or a portion of their debts over the three to five-year plan. In a Chapter 11 Subchapter V, the debtor must use their future income to repay their creditors, but may also include administrative expenses in the plan. Additionally, a Chapter 11 Subchapter V allows the debtor to confirm a plan without creditor approval, while a Chapter 13 requires the plan to be consensual.

4. Trustees Are Appointed in Subchapter V Chapter 11 Cases

When a business files for bankruptcy under Chapter 11, the court usually doesn't appoint a trustee. However, in Subchapter V cases, a trustee is automatically appointed. Despite this, the debtor retains control over their assets and business operations.

The role of a Subchapter V trustee is to act as a mediator between the debtor and their creditors. They may investigate the debtor's financial affairs, similar to a Chapter 7 trustee. However, their primary responsibility is to help create a feasible repayment plan that is fair to both the debtor and creditors. This impartial party can facilitate negotiations and make the process more efficient.

5. Subchapter V Can Protect Small Business Owners Personal Assets

Picture this: you're a small business owner who had to pledge personal assets to secure business debt. It's a risky move, but sometimes it's the only option. However, if you find yourself struggling to make payments, you may be facing some serious consequences. That's where the Subchapter V plan comes in. This provision can modify your loan agreement and help protect you from the usual downsides of filing for Chapter 11 bankruptcy. It's a game-changer for small business owners looking to navigate the complex world of debt management.

6. Subchapter V Fast Pace

If you're a small business owner considering filing for bankruptcy, you may want to look into Subchapter V. This type of bankruptcy case moves much faster than a typical Chapter 11 case, which can be a big advantage for small businesses.

Within 60 days of filing a Subchapter V case, the court holds a status conference. The debtor must submit a written report at least two weeks before this conference, detailing their efforts to negotiate a consensual plan with creditors. This helps keep the case moving along and ensures that everyone is on the same page.

One of the biggest benefits of Subchapter V is that it requires the debtor to file a plan of reorganization within 90 days of filing the bankruptcy petition. This is much faster than in a typical Chapter 11 case, where the process can drag on for months or even years. Of course, there are exceptions to this deadline - for example, if the debtor is facing difficulties due to the COVID-19 outbreak, a judge may extend the deadline. However, in general, Subchapter V is designed to be a quick and efficient way for small businesses to complete the bankruptcy process.

Another advantage of Subchapter V is that debtors are not required to file disclosure statements. This can speed up the process and relieve some of the requirements on a small business debtor. Overall, Subchapter V is a great option for small businesses that want to get through the bankruptcy process quickly and with as little hassle as possible.

Do You Need Help With Understanding A Subchapter V Chapter 11 Bankruptcy? 

If you're a small business owner struggling to keep up with debt obligations due to the COVID-19 pandemic, there's a new option available to you. The Small Business Reorganization Act (SBRA) includes provisions under Subchapter V that offer relief to those facing financial hardship.

Working with a Chapter 11 attorney, you can review your financial situation and determine if Subchapter V is the right solution for you. This new process provides a "pause button" for small business owners, allowing them to recover and rebuild after the pandemic shutdown ends.

By utilizing the SBRA, small business owners can avoid losing their company and benefit from a less expensive and faster Chapter 11 bankruptcy case.

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