How Chapter 11’s Subchapter V Affects Commercial Bankruptcies

Subchapter V is a new addition to Chapter 11 of the bankruptcy code that helps expedite the overall bankruptcy process for certain small businesses. It can assist small businesses in a faster and more cost-effective reorganization.

When the Small Business Reorganization Act (SBRA) was signed into law last year, it added a new subchapter to Chapter 11 of the bankruptcy code, with the goal of expediting small businesses through Chapter 11 and reducing the cost to reorganize.

Subchapter V of Chapter 11 went into effect in February and could be one reason why Chapter 11 commercial bankruptcies were up 43% in June. The new subchapter has served as a viable option for small businesses that are financially suffering through these uncertain times.

What Does Subchapter V Do?

If your business’s total debt, secured and unsecured, is less than $2,725,625, you may qualify for this streamlined Chapter 11 filing. As part of the CARES Act COVID-19 relief package, the total debt limit was temporarily increased from $2,725,625 to $7,500,000. This increased limit will revert to the $2,725,625 amount on the 1-year anniversary of the passing of the CARES Act.

A Subchapter V trustee does not have the power to liquidate the debtor’s assets. Instead, the trustee takes more of a development approach, facilitating a consensual reorganization plan, being a presence at major hearings, and ensuring that the agreed payment plan is met and maintained.

There’s also no formation of a creditors committee, which can help with the overall cost of the bankruptcy proceeding.

What’s Required of the Debtor Under Subchapter V

In this situation, only debtors can file a reorganization plan (under the non-Subchapter V version of Chapter 11, creditors, or other parties may propose a plan).

It also eliminates the Absolute Priority Rule, which states that a debtor cannot retain an ownership interest in assets unless all creditor claims are paid in full. The elimination of this rule allows the Subchapter V debtor greater flexibility in plan terms than a traditional Chapter 11 filing provides. Other stipulations do apply, however, when it comes to funding the overall reorganization plan.

In short, Subchapter V within Chapter 11 could be a usable option for businesses looking for a speedy and cost-effective approach to reorganization. However, just like other bankruptcy proceedings, there are still complex stipulations and rules to follow in order to fully complete the process and begin operations after the proceeding has closed.

It’s important to talk with a qualified bankruptcy attorney to understand your options and Natural State Law can be an effective solution for you in the Little Rock area. Call us at (501) 916-2878 to discuss how we can advise you through a potential Subchapter V proceeding.