Subchapter V: Bankruptcy for Small Business
While Chapter 11 of Title 11 of the United States Code (the Bankruptcy Code) provides a useful mechanism through which business entities may restructure or liquidate debts, the Chapter 11 process can be time-consuming and expensive. Subchapter V was established in order to provide small businesses a more streamlined process.
11.19.21
The Small Business Reorganization Act (SBRA) was signed into law on August 23, 2019, adding sections 1181 through 1195 to the Bankruptcy Code. Initially, the SBRA made debtors with a debt ceiling of $2,725,625 eligible for Subchapter V filings. On March 27, 2020, in response to the actual and anticipated difficulties COVID-19 caused small businesses, the Coronavirus Aid, Relief and Economic Securities Act (CARES Act) was signed into law. The CARES Act temporarily increased the debt ceiling for Subchapter V eligibility to $7,500,000. The sunset date on the increased debt ceiling under the CARES Act was scheduled for March 27, 2021; however, on March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act was signed into law, which further extended the increased debt ceiling until March 27, 2022. There has been significant discussion around further extending, or even increasing, the debt ceiling.
Subchapter V offers potential cost-saving and time-saving benefits. Among these benefits are the lack of unsecured creditor committees, except in exceptional circumstances, and relief from the requirement of paying quarterly fees to the Office of the United States Trustee. Subchapter V also provides that only the debtor can file a plan, requires a plan to be filed within 90 days of the petition date and removes the requirement for a separate disclosure statement with respect to the plan. Subchapter V requires that a status conference be held within the first 60 days of the filing that promotes judicial intervention in the case of a stalled process. All of these modifications promote a faster, cheaper, more streamlined path to confirmation.
In addition, Subchapter V sees the creation of a new actor in the bankruptcy process, the Subchapter V Trustee, who is tasked with assisting the debtor in reaching a consensual plan. Even where the Subchapter V Trustee cannot accomplish consensus and the debtor ends up filing a non-consensual plan, Subchapter V makes plan confirmation significantly easier than Chapter 11. Subchapter V allows for the confirmation of plans without an impaired accepting class, so long as the plan does not unfairly discriminate and is fair and equitable.
There are further advantages to filing for relief under Subchapter V. For a more in-depth discussion on this topic, we encourage you to view “Subchapter V – Bankruptcy for Small Business,” a webinar presented by Ray Lemisch and Mike Yurkewicz on November 3, 2021.