Subchapter V Bankruptcy: What It Is & How It Works

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Subchapter V bankruptcy is a relatively new provision added to the U.S. Bankruptcy Code by the Small Business Reorganization Act (SBRA) of 2019. Designed specifically for small businesses, Subchapter V offers a streamlined and cost-effective way to reorganize debts while maintaining operations.

If you own a small business and need to reorganize your debt, Subchapter V provides a different take on Chapter 11 that might work better for you. Keep reading to learn more.

What Is the Purpose of Subchapter V Bankruptcy?

Subchapter V aims to simplify and expedite the bankruptcy process for small businesses. Traditional Chapter 11 bankruptcy can be complex and costly, often overwhelming small businesses with limited resources. Subchapter V addresses these challenges by providing a more straightforward process, reducing administrative burdens, and lowering costs.

This new provision encourages businesses to continue operating while they reorganize their debts. It provides a clear framework that allows business owners to propose a viable reorganization plan and work toward financial stability without shutting down operations.

Is My Company Eligible for Subchapter V Bankruptcy?

Not every business qualifies for Subchapter V bankruptcy. The primary eligibility requirement is that the debtor must be engaged in commercial or business activities. As of the Bankruptcy Threshold Adjustment and Technical Corrections Act of 2022, the debt limit for businesses seeking to file under Subchapter V is set at $7.5 million. This limit includes both secured and unsecured debts.

Moreover, at least 50% of the debt must have arisen from the business’s commercial or business activities. This key eligibility criterion ensures that Subchapter V remains focused on assisting businesses rather than individuals with primarily consumer debts.

Filing for Subchapter V

Filing for Subchapter V bankruptcy begins with submitting a petition to the bankruptcy court. The petition must include standard bankruptcy schedules and a statement of financial affairs. Upon filing, an automatic stay takes effect, preventing creditors from taking collection actions against the debtor.

A key feature of Subchapter V is the appointment of a trustee. The trustee’s role is to oversee the case, facilitate the development of a consensual plan of reorganization, and ensure that the debtor complies with the bankruptcy requirements. However, unlike in traditional Chapter 11 cases, the debtor remains in possession of their assets and continues to operate the business.

The Subchapter V Reorganization Plan

One of the critical components of Subchapter V is the reorganization plan. The debtor must file this plan within 90 days of the bankruptcy filing, which is significantly faster than the deadline in a traditional Chapter 11 case. This expedited timeline encourages swift resolution and reduces the uncertainty that can disrupt business operations.

The plan outlines how the debtor intends to repay creditors over time while maintaining business operations. It must be fair and equitable, meaning that creditors should receive at least as much as they would under a Chapter 7 liquidation. The plan also needs to demonstrate feasibility, showing that the business can generate sufficient income to meet the plan’s requirements.

Confirming the Reorganization Plan

The court must confirm the reorganization plan for it to become binding. In Subchapter V cases, the plan can be confirmed more easily than in traditional Chapter 11 cases. The debtor doesn’t need to obtain acceptance from any class of creditors to confirm the plan, a significant departure from the requirements of Chapter 11.

The plan only requires court approval if it meets the legal standards for fairness, equity, and feasibility. This streamlined confirmation process reduces the time and expense associated with negotiating creditor support, making it more accessible for small businesses.

What Are the Benefits of Subchapter V Bankruptcy?

Subchapter V offers several benefits for small businesses facing financial difficulties. First, the process is more cost-effective due to reduced administrative requirements and faster timelines. These efficiencies make it a viable option for businesses with limited resources.

Second, Subchapter V allows business owners to retain control of their operations, providing them with the opportunity to restructure their debts without losing their livelihood. This aspect is particularly important for small business owners who are deeply involved in their company’s day-to-day activities.

Lastly, the streamlined confirmation process reduces the need for prolonged negotiations with creditors, enabling quicker resolutions. This expediency can be crucial for businesses that need to stabilize their finances and return to profitability promptly.

Challenges & Considerations

While Subchapter V offers many advantages, it also presents challenges. The expedited timelines can be demanding, requiring business owners to quickly prepare a comprehensive reorganization plan. Businesses must also generate sufficient income to meet the plan’s requirements, which can be challenging if revenue streams are unstable.

Additionally, the involvement of a trustee, while beneficial in many ways, adds another layer of oversight that business owners must navigate. Cooperation and transparency with the trustee are essential for a successful reorganization.

Contact Us for Assistance with Bankruptcy

Subchapter V bankruptcy represents a significant improvement in the bankruptcy process for small businesses. By offering a streamlined, cost-effective, and flexible approach, Subchapter V provides small business owners with a viable path to reorganize their debts and maintain their operations.

If you are a small business owner who’s interested in exploring your bankruptcy options, reach out to Buchalter & Pelphrey for help. Our experienced bankruptcy attorneys can assess your legal and financial situation and offer advice on which type of bankruptcy can work for you, along with the services necessary to help you pursue debt relief.

Learn more during an initial consultation. Contact us online today to request yours.

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