If you're a small business owner struggling with finances, there's a new option that could help. The Small Business Reorganization Act of 2019, also known as the SBRA, was put into effect on February 19, 2020, and it streamlines the Chapter 11 process for small businesses. This act makes it more efficient, effective, and affordable for small business owners to save their businesses with the help of the bankruptcy courts.
Before the addition of Chapter 11 Subchapter V, many small businesses couldn't afford to file for bankruptcy. The Chapter 11 process was too lengthy and costly. But now, small business owners have another option for seeking bankruptcy relief. This way, they can continue operating their company, keep their employees, and continue providing goods and services.
With Chapter 11 Subchapter V, small business owners can overcome a financial crisis and save their businesses. This new option allows for a more streamlined process that is more affordable for small businesses. It's a great way to get the help you need to keep your business running smoothly.
Chapter 11 Subchapter 5 Bankruptcy Process Overview
Bankruptcy cases are never the same. This means that the steps and requirements you need to follow may vary depending on your financial situation and the specific details of your case. So, you may need to complete additional steps and meet extra requirements based on your unique circumstances.
Step One: Does Your Company Qualify for Subchapter V of Chapter 11?
Did you know that corporations, partnerships, and individuals can file for bankruptcy under Subchapter V of Chapter 11? This option is not available for single-asset real estate businesses, but those who qualify can benefit from debt limits and streamlined proceedings.
For instance, to qualify for Subchapter V treatment, a business must have less than $2,725,625 in non-contingent, liquidated debt (secured and unsecured) that originated from business activities. However, the debt limit has been temporarily increased to $7,500,000 under the CARES Act, which will expire in March 2021 unless extended by Congress.
Subchapter V of Chapter 11 offers a faster and more cost-effective process for small businesses to restructure their debts and emerge from bankruptcy. By providing debt relief and flexibility, Subchapter V can help businesses get back on track and remain viable in the long run.
Step Two: Decide Whether to Hire a Chapter 11 Attorney
Have you heard of Subchapter V? It's basically a faster way to file for Chapter 11 bankruptcy. But don't be fooled, it's still a complex process.
Chapter 11 cases involve a lot of restructuring, from contracts to lease agreements and other debts, all in the hopes of keeping the business afloat. And it gets even more complicated with "cram downs" of liens that can exceed the collateral's value. Creditors are also categorized and treated differently based on their debt type.
If all of this sounds overwhelming, it might be a good idea to consult with a Chapter 11 bankruptcy attorney before diving into the process.
Step Three: Prepare and File Bankruptcy Petition and Bankruptcy Forms
If you're considering filing for bankruptcy, there are some important things you need to know. First, you'll need to prepare and file a bankruptcy petition, schedules, and statements. The good news is that the bankruptcy petition is the same for all chapters of bankruptcy, so you won't have to worry about different forms for different types of bankruptcy. However, when completing the petition, you'll need to select Chapter 11 and the option for Subchapter V of Chapter 11. The filing fee for a Chapter 11 Subchapter V bankruptcy case is $1,717.
Next, you'll need to fill out the remaining bankruptcy forms, which consist of schedules and statements that report your company’s assets, debts, income, expenses, and financial transactions. It's important to be accurate and complete when filling out these forms because when you sign them, you're stating that the information is correct under penalty of perjury. Once you file your bankruptcy petition, the clerk of court will assign a case number to your case, and notice of the bankruptcy filing will be mailed to your creditors.
It's important to note that Chapter 11 debtors are required to file additional forms and reports that are not required in other chapters of bankruptcy. For example, you'll need to file monthly operating reports, a list of your 20 largest unsecured creditors, entity ownership reports, and other periodic financial reports. Some of these reports are ongoing and must be filed throughout the Subchapter V case.
Step Four: Assignment of Bankruptcy Trustee
Subchapter V cases differ from standard Chapter 11 cases in that a trustee is assigned to each case. The United States Trustee (UST) Office appoints and supervises Subchapter V trustees. The trustee's primary responsibility is to facilitate a mutually agreed-upon Chapter 11 plan between the debtor and creditors. Additionally, the trustee has other duties under the Act, such as:
- Reviewing claims and disputing invalid claims
- Opposing the debtor's discharge if there are grounds for denying it
- Participating in the Status Conference, 341 Meeting, and other case-related hearings
- Assuming control of the debtor's assets and operating the company if the debtor loses the right to do so
- Preparing and submitting various reports, including a final report and accounting
The trustee's primary role, as previously mentioned, is to help the debtor create a viable plan. Subchapter V trustees often have business experience and can be an asset to the debtor.
Step Five: Attend Initial Debtor Interview, 341 First Meeting of Creditors, & Status Conference
If you're considering filing for bankruptcy under Subchapter V, it's important to understand the timeline of the process. One of the major benefits of Subchapter V is that the case is streamlined, meaning the process is rapid and efficient. Within ten days of filing your case, the U.S. Trustee's office schedules an Initial Debtor Interview (IDI). During the IDI, the U.S. Trustee will ask for preliminary information about your financial situation and ensure that you understand your responsibilities and requirements under Chapter 11, such as filing reports and setting up bank accounts.
Next up is the 341 Meeting of Creditors, which is held between 30 and 45 days after filing your case. This is a public hearing where the U.S. Trustee will ask you questions under oath about your business and financial affairs. Creditors or their attorneys may also appear to ask you questions. The length of the hearing can vary depending on the complexity of your case and its status.
Within the first 60 days of filing your case, a mandatory Status Conference will be scheduled. You'll need to file a status report 14 days before the conference, detailing your efforts to attain a consensual plan with your creditors. If you don't have a plan yet, the report should also include your anticipated future efforts to obtain one. This conference is an opportunity for you and your creditors to discuss the progress of your case and any potential issues that need to be addressed.
Step Six: File Chapter 11 Plan
When a business files for bankruptcy under Subchapter V, only the debtor is allowed to propose a plan of reorganization. This plan must be submitted within 90 days of filing the case and must include a brief history of the business operations, a liquidation analysis, and projections of the debtor's ability to complete the plan. Unlike a general Chapter 11 case, a disclosure statement is not required, making the process more streamlined.
The Subchapter V plan lasts for three to five years, and the debtor must contribute all projected disposable income to the bankruptcy plan. If the plan meets all the requirements for a Subchapter V Chapter 11 plan and all impaired classes of creditors accept it, the court may grant a consensual confirmation. In this case, the debtor pays creditors directly, may be discharged, and the trustee's services are terminated.
If the plan does not meet all the requirements for a consensual plan, the court may approve it as a non-consensual plan. However, this changes the Subchapter V process in several ways. For example, the debtor cannot receive a discharge until the last payment is made, and the trustee is responsible for disbursing payments under the plan. The trustee must file periodic and final reports and is not discharged until the case is complete.
Overall, Subchapter V provides a streamlined process for small businesses to reorganize and emerge from bankruptcy. However, it is important to meet all the requirements for a consensual plan to avoid the additional challenges and responsibilities that come with a non-consensual plan.
Chapter 11 Subchapter V Conclusion
Chapter 11 cases, including those under Subchapter V, can be quite complicated. While the above overview provides a general idea, it is important to note that Chapter 11 Subchapter V has several requirements that a debtor must fulfill to remain in Chapter 11 and achieve success.