As a result of the critical business disruption caused by COVID-19, more and more small businesses are considering filing for bankruptcy as a strategic move. The relatively new Small Business Reorganization Act (SBRA) and The Coronavirus Aid, Relief, and Economic Security (CARES) Act have presented new options for small to medium-sized businesses. In this blog, we’ll explore the Chapter 11 Subchapter V option and review some of the main differentiators for businesses that are considering this route.
How is does Subchapter V differ from Chapter 11?
Subchapter V was created for small businesses to find a middle ground between Chapter 7 and Chapter 11 bankruptcies after complaints of the process being too complex and costly. In short, it lowers the cost of bankruptcy for small businesses and streamlines the process. Subchapter V removes the creditor’s committee, decreases Trustee fees, and also eases or eliminates some of the time-consuming administrative rules from Chapter 11, including the “absolute priority rule” which governs the order of payment among creditors and shareholders.
A Trustee will be appointed under a Subchapter V and the debtor will stay in control of the business operations while reorganizing. In this situation, the role of the Trustee is similar to a Chapter 12 bankruptcy vs. a Chapter 7 or 11. They act as an advisor and will oversee some of the high-level processes to ensure the debtor is sticking to the plan.
Is my client or business eligible?
Prior to the CARES Act, a business debtor must be involved in commercial activity and the total secured or unsecured debts must be less than $2.75 M. to be eligible for the Subchapter V option. Back in March, Congress increased the amount to $7.5 M.
What are the filing requirements?
A Subchapter V debtor has 90 days to file the reorganization plan (compared to the 180 days in Chapter 11). You can apply for an extension on this deadline and, in light of the COVID-19 situation, the Bankruptcy Court will most likely approve the extension. In addition to the bankruptcy petition, the debtor must file a balance sheet, statement of operations, cash flow statements, and federal tax returns.
Also, unlike in Chapter 11 bankruptcy, the SBRA states that only the debtor will file a plan and they do not have to file a disclosure statement. Instead, the plan must include a history of business operations, a liquidation analysis, and confirmation that the debtor can meet the proposed payment plan. By removing a disclosure statement and potential competing plans from creditors, the reorganization process can happen quickly without increased costs.
What is the timeline?
One of the key differentiators in a Subchapter V bankruptcy filing is the speed of the process. With a 90 day turnaround, the debtor is required to present a detailed plan in a short amount of time. It’s essential that you seek counsel as soon as you experience financial difficulty, to hit the mark and get consent on the reorganization plan from the court. They will be looking for one of two things: 1. the debtor will be able to make all payments or 2. the debtor is reasonably likely to be able to make all payments and the plan outlines a suitable alternative to protect creditors if payments are not met. A plan is likely to be confirmed under the terms that all projected disposable income for three to five years will be used to make payments.
In this fast-pass “emergency bankruptcy” timeline, all major decisions have to be strategic and effective in order to reach the confirmation requirements, which can be achieved with the help of an experienced attorney.
Do I specifically need a bankruptcy attorney?
Yes. Business debtors must retain counsel to appear in litigation or in bankruptcy matters. It’s important that you seek counsel from an experienced bankruptcy attorney, early during this vulnerable time. We are seeing a number of general practitioners jump into the bankruptcy sphere in tandem with the economic outlook. Given the efficiency and detail required to successfully file for a Subchapter V, it’s in your best interest to invest in a competent attorney with years of experience in this sector. There are a number of moving parts that you need to be aware of from day one and a skilled attorney will help you meet the requirements.
The SBRA and the CAREs Act work in tandem to allow Subchapter V to lower costs and streamline the process. Get in touch with us to enable your small businesses to survive bankruptcy, reorganize assets, and retain control of your operations throughout your path to confirmation in the bankruptcy process.