The Small Business Reform Act (SBRA) and the recent CARES Act contains bankruptcy-related provisions that should provide relief to small businesses seeking bankruptcy protection. These provisions exist in Subchapter V, a new code section under Chapter 11 Bankruptcy. This new option’s design helps small businesses– that may have otherwise been forced to liquidate under Chapter 7. As the effects of COVID-19 on businesses are still unraveling, Chapter 11, Subchapter V Bankruptcy can be a viable option for finically distressed companies.
Subchapter V was introduced in early 2020 to make Chapter 11 Bankruptcy more accessible to small businesses. Under Subchapter V, business debtors can reorganize and come out of bankruptcy with their companies running.
Typically, Chapter 11 Bankruptcy was only feasible for big businesses with extensive resources and access to reliable funds. The costly and timely process of Chapter 11 Bankruptcy often drained small business and forced them into liquidation—or Chapter 7 Bankruptcy—anyway.
Subchapter V, as enacted, allows for a streamlined process with less administration and defined timelines for the debtor to propose a plan of reorganization.
Expand the debt limit to file to $7.5 million from $2.7 million:
The CARES Act expands the debt limit to accommodate more small businesses that may—but not must—find themselves in greater debt due to hardships inflicted by the COVID-19 pandemic. This is a small window of opportunity, as the limit will revert to $2.7 million in March of 2021.
Remove the need for a creditor committee:
Not requiring a creditor committee removes another debtor expense, making Subchapter V more affordable than a regular Chapter 11 filing.
No quarterly trustee fees:
There are no trustee fees that are typically calculated under Chapter 11. Further, the debtor has an option to pay administrative expenses—like legal, accounting and administrative fees—over the life of the bankruptcy plan in some instances.
A Trustee is appointed:
A Trustee is appointed to assist the debtor in negotiating a consensual plan of reorganization and facilitates the process. Unlike a Chapter 7 filing, the Trustee does not take over the operations of the debtor.
Enforce a strict timeline:
Within the first 45 days of filing, the debtor needs to make progress toward reaching an agreement on a reorganization plan with the creditor body. At a status conference on the 60-day mark, the debtor, trustee and court discuss the progress. The debtor must then submit an Emergence Plan to the court within 90 days of filing. Under a typical Chapter 11 filing, this process can take years.
Only allow debtors to file a Plan of Reorganization:
In a Chapter 11 filing, any party can submit a Plan of Reorganization. Under Subchapter V, only the debtor can submit a Plan, keeping them in control of their business processes. The Plan must include a brief disclosure, history of business operations, liquidation analysis and a projection demonstrating that the debtor will be able to make payments under the plan.
The cost-saving attributes of Subchapter V work in the interest of small businesses. In addition to reduced professional costs, limiting the time a company can remain in bankruptcy reduces costs-associated, and the cost of maintaining the company through the bankruptcy process. The heightened speed of the process also incentivizes creditors to work quickly with the debtor party and receive payments sooner.
The uniqueness of Subchapter V—the streamlined process and slashed administrative fees—means that Chapter 11 Bankruptcy may be a feasible option for small businesses facing financial hardship.
Is Subchapter V right for you? Here is what you should know before filing: Considerations Before Filing Bankruptcy.