Subchapter V Bankruptcy: A “Better Way” for Small Businesses

Filing a Lower Cost “Chapter 5” Bankruptcy Case Could Save Your Business

Why did it take so long for Congress to pass a law providing a “better way” to reorganize financially troubled small businesses? The Small Business Reorganization Act of 2019 (SBRA) created a new Subchapter V of Chapter 11, which enables small businesses to reorganize and discharge debt more efficiently and without the high administrative costs of a Chapter 11 bankruptcy filing. This timely new law went into effect on February 19, 2020. In this article, we’ll explain why filing Subchapter V bankruptcy may be the lifeline that small businesses need to survive COVID-19.

Chapter 11 is a fit for “big” corporations with large scale operations and complex capital structures. Chapter 11 was not designed for the “mom and pop” store on the corner. Bankruptcy professionals have argued for years that Chapter 11 provides secured creditors with excessive influence over the bankruptcy process, which includes a “high voting threshold” and complicated, detailed disclosures.

Bankruptcy subchapter V provides procedures and incentives to encourage creditors and debtors to come to the table and agree to a consensual plan for the business.

A debtor – an individual or corporate entity – must be engaged in commercial or business activities and have liquidated secured and/or unsecured debt(s) not exceeding $7,500.000.00 to be eligible for relief under Subchapter 5. As enacted in 2019, the statute applied to businesses with not more than $2.7 million ($2,725,625 to be precise) in secured and unsecured debts. Effective March 27, 2020, under the then just-enacted Coronavirus Aid, Relief and Economic Security Act (CARES Act), that ceiling has been raised to $7.5 million, widening its potential reach to a much larger group of businesses.

Differences Between Filing Chapter 11 and Subchapter V Bankruptcy

• Only the debtor can propose a plan of reorganization when you file a Subchapter V bankruptcy case. In a Chapter 11 case, the creditors can submit a reorganization plan if the debtor has not done so within 120 days. The trade-off is that debtor must propose its plan within 90 days of commencement of its bankruptcy proceeding in a Subchapter V case.
• In a Subchapter V bankruptcy case, there will be no creditors’ committee for unsecured creditors unless ordered by the bankruptcy court—huge potential expense savings for the debtor since it typically must pay the fees and expenses of professional advisors to that committee.
• The debtor’s plan does not need approval by its creditors, eliminating the requirement for a court-approved disclosure statement and the costly process of soliciting creditor votes in Subchapter V bankruptcy. However, creditors can object if not all the debtor’s projected disposable income for at least three years will be used for repayment under the proposed plan.
• Chapter 11’s automatic imposition of a U.S Trustee (with its associated quarterly trustee fees and reporting requirements) to oversee the debtor’s business is eliminated in favor of a private trustee (from among candidates approved by the Department of Justice under its U.S. Trustee program) in a Subchapter V bankruptcy case. Under the SBRA, the private trustee is there solely to facilitate a plan of reorganization rather than oversee or operate the debtor’s business.
• The absolute priority rule that in a Chapter 11 bankruptcy case is used to decide what portion of payments will be received by which creditors is eliminated in a Subchapter V bankruptcy filing. Here, the SBRA’s elimination of this rule allows the debtor to retain an ownership interest in its business through the bankruptcy proceeding even if it fails to contribute “new value” towards a reorganization plan or offer a plan that will not pay its creditors in full. The plan of reorganization cannot discriminate unfairly, and instead must be judged to be fair and equitable for each class of impaired creditors.
• Finally, the debtor can pay its administrative claims over the term of a Subchapter V bankruptcy plan, as opposed to payment on the date of confirmation of the plan as is the case in a Chapter 11 bankruptcy case.

Summary of the Benefits of Filing a Subchapter V Bankruptcy Case

• Provide time and ability to restructure the debtor’s business.
• Rehabilitate an otherwise financially viable business.
• Provide a method to discharge debt and a “fresh start” for the company.
• Ensure equality of distribution among creditors.

Debtor Strategies in a Subchapter V Bankruptcy Case

In addition to the automatic stay which protects the business and its assets from collection, the debtor can:

• Suspend debt payments, including past due payments to landlords, general creditors, and future payments to equipment lessors for a limited period.
• With court approval, sell assets that are free and clear of all claims and liens.
• Reject onerous leases and unprofitable contracts.
• Allow the use of cash or other collateral of a secured lender (creditor) either with the creditor’s agreement or upon showing that the proposed use of money or collateral does not endanger the lender’s interest in the collateral. Allows post-petition financing to become senior to existing debt either by agreement or by order of the bankruptcy court.
• Pursues a plan with payment terms that are “fair and equitable”. The plan may include a “cram down” which imposes payments representing the present value – avoiding the accrual of penalties and interest – of the creditor’s claims over time.
• Filing a Subchapter V bankruptcy case moves the litigation from state court to the bankruptcy court.

Why You Should File Subchapter V Bankruptcy with the Sterbick Law Firm

COVID-19 is severely impacting the nation’s economy and markets. The negative financial impact has impaired the ability of businesses to meet their financial obligations to suppliers and vendors. Many businesses are being forced to restructure their obligations to suppliers and vendors, and some need to file for bankruptcy protection. Some may have additional complications due to IRS tax problems. John Sterbick has practiced law at the firm that bears his name for over thirty years, and he has built his firm into one of the foremost experts on IRS tax law in the state of Washington. The Law Offices of John Sterbick has filed bankruptcies on behalf of financially distressed businesses for over twelve years. The combination of the Sterbick firm’s recognized expertise and years of experience means that no matter how complex your business problems may be, John Sterbick and the team at his firm will provide you with expert representation you can trust to get you through it.

Contact us today, and we’ll help you determine whether filing Subchapter V bankruptcy with the Sterbick law firm is the best way to protect your business.