A Straightforward View of Chapter 11

Subchapter V Bankruptcy – Quick Overview

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In a world full of information that is available at our fingertips, there are times for in-depth research and other times for quick snippets of information. This blog is in place to provide a fast overview of Chapter 11 Subchapter V for Small Business. At Michael H. Moody, Law P.A. offers over 17 years of bankruptcy experience and knowledge. We strive to provide guidance and information as transparent as possible for our business clients.

What is Chapter 11 Subchapter V?

              Chapter 11 of the Bankruptcy Code generally allows businesses (or individuals) to reorganize their debts while continuing operations, rather than liquidating assets.  Before Congress enacted Subchapter V, a business owners could only retain equity and continue in operation if all creditor classes either consented, were paid in full, or an exception applied typically involving old-equity contributing a new value payment at confirmation.

Subchapter V, added in 2019 through the Small Business Reorganization Act (SBRA), is a specialized subset designed specifically for small business debtors. It streamlines the traditional Chapter 11 process to make it faster, less expensive, and more accessible for smaller entities. To qualify, the debtor must be engaged in commercial or business activities, with aggregate noncontingent liquidated secured and unsecured debts not exceedingly $3.424 million (adjusted periodically for inflation; confirm current limits via the U.S. Trustee’s office).  The major benefit of Subchapter V is that is allows business to stay in operation so long as the business contributes a fair portion of the business’ 3-5 years of projected disposable income (after payment of all business expenses) to a pot for the payment of creditors.   This monumental shift enables businesses to thrive and reorganize if they end up in a jam due to mistakes or overborrowing at the business’ inception.

The debtor must elect Subchapter V treatment explicitly when filing the petition—otherwise, it defaults to a standard Chapter 11 case. Unlike traditional Chapter 11, a Subchapter V trustee is appointed to facilitate the case, but the debtor typically remains in possession of their business (debtor-in-possession, or DIP).

How does Chapter 11 Subchapter V Benefit Business?

              Subchapter V is primarily used by small businesses or individuals with business debts to restructure obligations, reduce or extend payments, and emerge viable without liquidation. It’s ideal for scenarios like cash flow issues, overwhelming debt from loans or leases, or economic downturns, allowing the business to continue operating while repaying creditors over time. Below are six key benefits of filing a Subchapter V bankruptcy.

6 Key benefits include:

1. Streamlined and Cost-Effective Process: No automatic creditors’ committee (which reduces fees and complexity), unless cause is shown. This can cut legal and administrative costs by up to 50% compared to traditional Chapter 11.
2. Faster Resolution: Accelerated deadlines lead to quicker plan confirmation, often within months rather than years.
3. Debtor Control: Only the debtor can file a reorganization plan, eliminating competing plans from creditors. The plan can be confirmed without creditor consent if it’s “fair and equitable,” bypassing the absolute priority rule that often blocks confirmations in standard cases.
4. Flexible Payments: The plan commits the debtor’s projected disposable income (or equivalent value) over 3-5 years, allowing for debt cram-downs and modifications.
5. No Separate Disclosure Statement Required: If the plan contains adequate information, the court may waive this, saving time and expenses.
6. Automatic Stay Protection: Immediately halts collections, lawsuits, and foreclosures upon filing, giving breathing room.

Overall, it’s a powerful tool for preserving jobs, assets, and operations in small firms, with higher success rates due to its efficiency.

What documents are needed to assess your small business?

              At Michael H. Moody Law, we offer free consultations in-person with all Chapter 11 matters. We have found over the years the in-person consultations are the best for Chapter 11 bankruptcy matters. We encourage you as the business owner to gather as much information before the consultations for Mr. Moody to evaluate and guide you in the best possible way. Below is the starting point of documents needed to evaluate whether your business qualifies for a Chapter 11 Subchapter V small business bankruptcy.

1. Financial Statements (Balance Sheet, Income Statement, Cash Flow Projections): Needed immediately upon client intake (within 1-2 days). These assess debt levels (must be under the cap) and viability. Review for the past 2-3 years to project disposable income.
   • Debt Schedules and Creditor Lists: Collect within 1 week. Include all secured/unsecured debts, leases, and contracts to confirm eligibility (at least 50% must be business-related) and identify potential issues like insider claims.
   • Tax Returns and Filings: Gather federal/state returns for the last 3-4 years within 1-2 weeks. Essential for identifying tax debts (priority claims) and ensuring compliance.
   • Asset Valuations and Inventory Lists: Obtain appraisals or estimates within 2 weeks if needed for secured claims.
   • Statement of Financial Affairs (SOFA) Draft: Prepare a preliminary version within 2 weeks to disclose recent transactions, payments, and potential avoidance actions.
   • Budgets and Projections: Develop or review operating budgets within 1-2 weeks to support the reorganization plan.

The timeline of a Chapter 11 Subchapter V Bankruptcy

              The blueprint or timeline of a Chapter 11 Subchapter V bankruptcy is intentionally quick. Below is an overview of most standard cases. These are general; actual timelines vary by jurisdiction and case complexity.

1. Day 0: Petition Filing: Submit the voluntary petition, electing Subchapter V. Automatic stay begins. Include initial documents like schedules, SOFA, and a list of top 20 creditors.
   • Within 14 Days: File a status report detailing the debtor’s efforts to attain a consensual plan.
   • Within 60 Days: Status conference with the court to discuss progress.
   • Within 90 Days: Debtor must file the reorganization plan (extendable only for cause, up to 180 days max).The plan outlines debt treatment, payments (over 3-5 years), and operations.
   • Post-Plan Filing (30-60 Days Typical): Creditors’ meeting (Section 341), plan objections, and confirmation hearing. Confirmation can occur as quickly as 4-6 months from filing if uncontested.
   • Ongoing (3-5 Years): Post-confirmation, the debtor makes plan payments. The trustee monitors compliance: discharge follows successful completion.

Michael H. Moody Law, P.A. is prepared and ready to serve your business in the best possible way. All matters are unique and require an open conversation on what you, as the business owner, are interested in doing to provide a healthier financial business structure. Give us a call today to schedule your free consultation with Mr. Moody and the team at Michael H. Moody Law, P.A.