This post is part of a series of posts entitled First Considerations for the Financially Distressed Business. For a comprehensive list of articles contained in this series, click here.
As is evident from previous sections, chapter 11 bankruptcy cases are often times complex, costly and onerous. Because of this, they rarely succeed in helping small businesses to survive. Fortunately, in August 2019, Congress passed the Small Business Reorganization Act of 2019 (SBRA), which became effective in February 2020. The purpose of the SBRA is to make chapter 11 reorganization faster and less expensive for small businesses. It can be thought of as a balance between chapter 7 and chapter 11 bankruptcies. To take advantage of the SBRA, a debtor must elect to proceed under Subchapter V of Chapter 11 of the Bankruptcy Code.
Unfortunately, eligibility for Subchapter V is restricted to a specific group of debtors. To be eligible, a debtor must be an individual or entity “engaged in commercial or business activities” that has 50% or more of its debts arising from those activities, and with total non-contingent, liquidated debts (both secured and unsecured) of no more than $2,725,625.00. In response to the Coronavirus (COVID-19) pandemic, the debt limit for eligibility has been increased to $7,500,000.00 for one year, ending March 27, 2021. This increase allows for large companies to take advantage of Subchapter V. Upon filing its bankruptcy petition, a Subchapter V debtor must also file a balance sheet, statement of operations, cash flow statements and federal tax returns.
Upon a debtor’s election of Subchapter V of Chapter 11, the court will appoint a trustee. This trustee does not take possession of the debtor’s assets and lacks the ability to sell those assets. Instead, the debtor retains control of its assets and operations with the Subchapter V trustee acting more like an advisor. The trustee’s main responsibility is to help facilitate a consensual plan among the debtor and its creditors. The thought is that the involvement of a neutral third-party may increase the likelihood that the debtor and creditors reach reasonable and just resolutions.
In a Subchapter V case, the debtor is the only party permitted to file a plan. Such plan is required to be filed within ninety days of the petition date, creating a timeline that is much faster than a traditional chapter 11 case. The bankruptcy court will hold a status conference within sixty days from the filing of the bankruptcy. Following this status conference, the debtor must report in writing on the efforts made, and to be made, to file a consensual plan. No disclosure statement is required in Subchapter V, instead the plan simply must include a brief history of the debtor’s business operations, a liquidation analysis, and projections regarding the proposed plan payments. Lastly, there is no need to obtain the acceptance of an impaired consenting class of creditors for the confirmation of a Subchapter V plan as there would be for other chapter 11 plans.
Similar to a chapter 13 case for individuals with regular monthly income, a Subchapter V debtor is afforded the ability to spread repayment of its debt over three to five years. See 11 U.S.C. § 1191. During this time, the debtor is required to allocate all projected disposable income to paying creditors. Id. Additionally, unlike in a traditional chapter 11 case, administrative expenses do not need to be paid at plan confirmation, but instead can be paid over the life of the plan.