Chapter 11, Subchapter V Bankruptcy
Filing Chapter 11 bankruptcy allows businesses to remain open and in operation while repaying creditors over a set period. However, pursuing this route is generally too expensive and complicated for most small business owners. Therefore, the Small Business Reorganization Act created Subchapter V to eliminate numerous Chapter 11 requirements. Thus, the addition makes reorganization bankruptcies more attainable for small businesses.
Filing for Bankruptcy as a Business Owner
There are several different bankruptcy options to seek debt relief if you’re a business owner. You can consider filing for Chapter 7 or Chapter 11 bankruptcy.
Note – If you run your company as a sole proprietorship, you can file Chapter 13 in your name and include your business debts in your plan.
Chapter 7 bankruptcy is known as “straight bankruptcy.” It aims to eliminate most, if not all, of your debt in exchange for your property. You’ll be obligated to sell your business assets in their entirety, pay creditors, and close your business. However, you’ll be debt-free.
Chapter 11 bankruptcy is known as “reorganization bankruptcy,” typically involving organizations, small businesses, corporations, or partnerships with a great deal of debt. You can remain open while you negotiate payment plans with your creditors.
What Is Subchapter V?
Subchapter V was added to Chapter 11 of the US Bankruptcy Code and went into effect in 2020. The subchapter was intended to make bankruptcies involving reorganizations more accessible for small businesses.
Who Can Qualify for Subchapter V?
To qualify for Chapter V bankruptcy, businesses must:
- Engage in business or commercial activities
- Ensure their unsecured and secured debts don’t exceed $2,725,625
- Have a minimum of 50% of business debt result from business activities
- Not include debt owed to company insiders
Note – You don’t qualify for Chapter V if your primary business activity is owning and operating a single property.
Advantages of Subchapter V
Subchapter V has many advantages, including removing many Chapter 11 requirements. The following is a list of benefits associated with filing for this subchapter.
- Eliminating the absolute priority rule
Absolute priority is a rule in corporate bankruptcies that determine what order of payment will go to creditors and shareholders. For example, senior creditors are paid before junior creditors. However, there isn’t an absolute priority rule when filing Subchapter V.
- Remaining open operationally
Similar to the traditional Chapter 11, you’ll be able to keep your business open while repaying creditors
Note – While on the plan, you’ll have to pay your unsecured creditors the total amount of your disposable income.
- No disclosure is required
- Installments of expenses paid
Instead of paying the administrative expenses in their entirety, you can settle your costs in installments.
- Plan exclusivity
The debtor alone may file Subchapter V, and there isn’t an exclusivity period expiring after a certain period.
- Reduced administrative expenses
- Increased protection of the automatic stay
An individual may file a second case within two years of the prior case, staying the actions of creditors pursuing the debtor.
- Easier counsel retention
- There is no vote required to confirm the plan
The debtor can establish a cramdown plan with no approval from creditors.
- Modification of specific mortgages
- Post-confirmation plan alterations
After confirmation, only the filer may modify the plan.
- The discharge
The debtor can obtain a discharge on the effective plan date, given consensual confirmation provisions.
- No limits in the modification of motor vehicle loans
Disadvantages of Subchapter V
While there are numerous advantages to filing Subchapter V, there are several disadvantages, including:
- Limited eligibility, as stated earlier
- Plan deadlines where the individual has 90 days to file a plan
- Remedies upon plan default, which says the program must provide appropriate corrections if payments aren’t made
- Limits on cash collateral use
- Mandatory trustee appointment
- Required status conference
- Dedicated projected disposable income to pay creditors
Subchapter V simplifies Chapter 11 for small businesses. But the process can still be complex. A knowledgeable lawyer can help you thoroughly understand the proceeding and ensure you achieve the greatest possible outcome. At Mummert Law, we’re available for a consultation, at which time we’ll sit down together, evaluate your position, and determine the best way to proceed. So don’t go it alone when it comes to bankruptcy. Make your appointment with Mummert Law today!