Subchapter V of Chapter 11 Bankruptcy
Business owners who are facing financial pressure can consider multiple forms of bankruptcy. While many business owners file under Chapter 7, others file under Chapter 11, which is a chapter of the U.S. Bankruptcy Code that is primarily designed for businesses. It allows businesses to reorganize and continue operations, rather than shutting down and liquidating assets. Owners of small businesses often have found Chapter 11 overly cumbersome and expensive. Responding to these concerns, Congress added Subchapter V of Chapter 11 through the Small Business Reorganization Act of 2019. Subchapter V makes the process of filing under Chapter 11 more streamlined and affordable.
Generally, eligibility is limited to debtors that are engaged in commercial activity and have less than a certain amount of total secured and unsecured debt, of which at least half comes from business activities. (There is an exclusion for single-asset real estate operations.) The CARES Act greatly increased the debt ceiling due to the COVID-19 pandemic, but it is expected to revert to the original ceiling in June 2024.
Filing Under Subchapter V
A debtor must specifically state that they are filing under Subchapter V, or the bankruptcy will be treated as a standard Chapter 11 bankruptcy. The debtor must submit a balance sheet, cash flow statements, a statement of operations, and federal tax returns to the court with their bankruptcy petition.
One of the key differences between Subchapter V and a standard Chapter 11 bankruptcy is the absence of a disclosure statement. A standard Chapter 11 bankruptcy will require a debtor to provide this statement so that creditors can review their bankruptcy plan and decide whether to vote for it. This can make the process less efficient by creating disputes between the debtor and creditors. Instead of providing a disclosure statement, the debtor must provide a concise history of business operations, a liquidation analysis, and projections that show how they will keep up with their payments under the bankruptcy plan.
Another important difference from the usual Chapter 11 process is the timeline in a Subchapter V bankruptcy. Within 60 days after the debtor files their petition with the bankruptcy court, the court will hold a status conference. The debtor must submit a written report on their ongoing and planned efforts to produce a consensual bankruptcy plan 14 days before the status conference. Within 90 days after the debtor files their petition, they must submit their plan of reorganization. Thus, a debtor must act efficiently to maintain their eligibility.
The Role of a Trustee in Subchapter V
As with standard Chapter 11 bankruptcies, the bankruptcy court will appoint a trustee to oversee a bankruptcy under Subchapter V. However, the trustee will not control the assets of the debtor, so they cannot sell them. The trustee will assume a more passive role, helping the debtor craft their bankruptcy plan and collecting their payments under the plan. The trustee also will appear at hearings during the process.
The Subchapter V Plan
Bankruptcies under Subchapter V generally do not involve a committee of creditors. This is another way of streamlining the process. While creditors normally would vote on a bankruptcy plan in a Chapter 11 bankruptcy, a debtor does not need to get approval for their plan from creditors under Subchapter V. The debtor still must meet certain requirements for the plan to be approved by the court if it is non-consensual. The court will approve the plan only if creditors would receive as much under the plan as they would if the business were liquidated under Chapter 7. Also, the plan must be fair and equitable. The court will approve the plan only if it finds that the debtor will be able to keep up with their payments, or if it is reasonably likely that the debtor will be able to keep up with their payments, and creditors will be protected under the plan if the debtor does not keep up with their payments.
A Subchapter V plan may provide that the debtor will use all of their projected disposable income to make their payments under the plan over a period of three to five years. This involves allocating all of their financial resources to plan payments, except for those needed to support the debtor and their dependents, as well as any expenses needed to keep the business operating. A plan with this provision somewhat resembles a Chapter 13 bankruptcy repayment plan.
A non-consensual plan under Subchapter V will lead to a discharge only if the debtor makes all the payments required under the plan. A consensual plan (approved by creditors) will lead to a discharge at confirmation.
Additional Rules Under Subchapter V
The Small Business Reorganization Act contains several further provisions that may modify the rights of a debtor, depending on their circumstances. For example, a lien secured only by the personal residence of a debtor may be avoided if certain conditions apply. The SBRA also provides rules for clawback actions, which occur when a debtor or the bankruptcy trustee attempts to recover funds from entities that received them before the debtor filed. These rules protect certain types of creditors. Considering the many nuances of the SBRA and Subchapter V, a business owner may want to discuss their options with a bankruptcy attorney before deciding their course of action.
