Companies and individuals facing significant financial difficulties may have the option to restructure their debts and reorganize their business operations through a Chapter 11 bankruptcy. Historically, many smaller businesses and individual sole proprietors often found it prohibitively complicated and expensive to complete a Chapter 11 bankruptcy. As a result, many small and family businesses chose to close their business instead.
To address this problem, Congress established a new form of small business bankruptcy protection under Chapter 11, called Subchapter V. It gives struggling small businesses an easier way to reorganize their debts.
To learn if filing for bankruptcy under Subchapter V of Chapter 11 of the Bankruptcy Code might be right for you, turn to the Loan Lawyers for help. Our foreclosure defense, debt defense, and bankruptcy law firm helps individuals and businesses find solutions to overwhelming debt and other financial problems.
Our attorneys are dedicated to finding unique and tailored solutions to each of our client’s cases. Our experienced legal team can evaluate your or your business’s situation and advise you on various options you may have to reduce or eliminate your debt.
We can help guide you through alternatives to bankruptcy when appropriate for your circumstances or pursue a bankruptcy petition on your behalf when it is the best option for resolving your financial issues. We’ll dedicate ourselves to helping you find the best path forward.
Call or contact us today for a free initial case evaluation to discuss the best options for helping you resolve your financial difficulties so that you can build a sustainable financial future.
What Is the Small Business Reorganization Act?
In 2019, Congress passed the Small Business Reorganization Act (SBRA), which established a new subchapter under Chapter 11 of the Bankruptcy Code, the chapter of the code that governs reorganization bankruptcies for businesses. The new subchapter V provides for a special type of Chapter 11 bankruptcy intended to benefit smaller businesses, including sole proprietors and individuals who primarily have business-related debt. Subchapter V offers a path to bankruptcy that is less expensive, simpler, and faster than the traditional Chapter 11 bankruptcy.
The SBRA was enacted to recognize that many small and family-owned businesses do not survive past the first year of operations and only a small percentage of these businesses are still operating after five or ten years. While a Chapter 11 bankruptcy could help some small businesses remain open by reorganizing their debts, the requirements of Chapter 11 often proved too cumbersome and expensive for a small business.
So, Subchapter V is intended to make reorganization bankruptcy available to more small businesses to help more of these companies survive past the initial growing pains.
Subchapter V of the Chapter 11 Bankruptcy Code
Subchapter V streamlines the reorganization process for small businesses and individuals engaged in business or commercial operations. Some of the features of a Subchapter V bankruptcy include:
- Shorter case timelines, including a requirement that the reorganization plan be filed within 90 days
- Elimination of the need to file a disclosure statement
- Elimination of solicitation of votes of creditors
- Elimination of the creditors’ committee (in most cases)
- Greater opportunities to obtain secured creditor approval for a reorganization plan
- Reduced, less intrusive role of the bankruptcy trustee
Who Can File Bankruptcy Under Subchapter V of Chapter 11?
The SBRA took effect for cases filed on or after March 1, 2020. Small business debtors, including individuals with primarily business-related debt, who have combined secured and unsecured debts that total less than $2,725,625, may choose to file for bankruptcy under Subchapter V. However, in response to the COVID-19 pandemic, Congress increased this debt limit to $7.5 million for bankruptcies filed before March 27, 2022.
When an individual files under Subchapter V, at least 50 percent of their debts must have arisen from commercial or business activities, and the individual must be engaged in business or commercial activities.
A business or individual cannot qualify as a small business debtor if the debtor’s commercial or business activities only involve a single real estate asset.
Benefits of Filing Chapter 11 Subchapter V Bankruptcy
Arguably, one of Subchapter V bankruptcy’s most significant benefits over traditional Chapter 11 bankruptcy involves eliminating the absolute priority rule in Chapter 11 bankruptcy. Under the absolute priority rule, when a class of unsecured creditors failed to vote in favor of a cramdown plan, the debtor was required to pay the claims of any objecting unsecured creditors in full if any junior interests existed.
This made confirmation of Chapter 11 plans difficult unless unsecured creditors unanimously agreed to the plan or those unsecured creditors received full payment. As a result, individual debtors often could not retain nonexempt property over the objections of unsecured creditors unless those creditors were paid in full.
Under Subchapter V, junior interests are not limited in retaining their interests when unsecured creditors vote against the reorganization plan, so long as all the debtor’s projected disposable income is applied to the plan or the value of property distributed under the plan is not valued at less than the projected disposable income. The practical effect of this change is that debtors can keep more property and discharge more debt.
Other benefits of Subchapter V bankruptcy not afforded in a traditional Chapter 11 bankruptcy are:
- The debtor has total exclusivity to file a reorganization plan, with no time limit that, after expiration, allows a debtor’s creditors to propose a competing plan.
- There are no U.S. trustee fees and no committee of creditors (unless otherwise ordered by the bankruptcy court), which significantly reduces a debtor’s administrative costs.
- The debtor can retain counsel so long as counsel is owed less than $10,000 in pre-petition legal fees.
- Debtors can modify the mortgage on their principal residence when the mortgage proceeds were primarily used in connection with the debtor’s business or commercial activities.
- Only the debtor can modify a reorganization plan after confirmation. A trustee or creditor may not seek modification. This benefits the debtor so that they do not have to make larger plan payments if their business performs better than they anticipated.
- Debtors can spread out payment of administrative costs over the duration of the reorganization plan.
- A debtor can obtain an early discharge on the effective date of a consensual plan. Discharge on cramdown plans is still only granted upon completion of plan payments.
- There is no limit on the cramdown of vehicle loans, which can allow a debtor to force their lender to accept payments equal to the value of the vehicle, even if the loan amount exceeds the vehicle’s value.
- The automatic stay provides increased protections.
- There are shorter time limits to file the reorganization plan, which speeds up the bankruptcy process.
Do I Need a Lawyer for Subchapter V – Chapter 11 Bankruptcy?
Despite the reduced complexity of a Subchapter V bankruptcy, potential filers should still strongly consider hiring an attorney to help them through the bankruptcy process. In cases when a debtor is organized as a corporation or LLC or some other formal company structure, bankruptcy court rules typically require such debtors to retain legal counsel to represent them in court. Only natural persons may represent themselves before the bankruptcy court.
Bankruptcy laws, even under Subchapter V, can be incredibly complex. The bankruptcy court cannot answer any legal questions you may have, so it is in your best interest to hire a knowledgeable bankruptcy lawyer.
Only an attorney that you have retained to represent you can explain your legal rights, options, and obligations. Without legal representation, you may end up making a mistake that results in you losing out on important legal rights and opportunities.
A bankruptcy attorney can also help you prepare the documents required for your case, including your bankruptcy petition. More importantly, your lawyer can also help you through the process of preparing the repayment or reorganization plan in your case. This plan must meet specific requirements under the Code. Non-conforming plans will be rejected by the bankruptcy court, potentially jeopardizing your case.
An attorney can communicate with your creditors on your behalf to secure any consent required to approve your plan. An attorney can also help protect you if creditors continue collection efforts in violation of the automatic stay. Finally, an attorney can also handle communications on your behalf with the trustee for your case and with the bankruptcy court.
When you hire Loan Lawyers, you can count on us to:
- Properly account for your debt and income – When you file bankruptcy, you will need to complete detailed lists of your debts, assets, sources of income, and other financial matters. Failing to provide accurate information can result in a rejection of your petition or can make certain debts ineligible to restructure. We can help account for this information to avoid these unfavorable outcomes.
- Develop a personalized reorganization plan – We can advise you on which assets to retain and how to structure a reorganization plan that is best for you.
- Negotiate with creditors – We will use our tough negotiating skills to reduce your debt as much as possible.
- Adhere to applicable deadlines – We will explain your obligations and the time limits that apply in your case to ensure that you comply with them.
- Represent your interests – Throughout the entire process, our team will be by your side, advising you of your legal rights and options. If any disputes or additional claims arise, we can help defend your interests.
If you are considering filing for Chapter 11 bankruptcy under Subchapter V, contact Loan Lawyers today for a free, confidential consultation with our experienced South Florida bankruptcy attorneys. Learn more about how our firm can help guide you through the process of an SBRA bankruptcy.