Small Business Bankruptcy
You can file bankruptcy to save your company. Fortunately, Congress passed a law in 2019 called the Small Business Reorganization Act (SBRA) which included a provision known as Subchapter V of Chapter 11 of the Bankruptcy Code. The new subsection, which became effective in February of 2020, is not a response to Covid-19, but by creating a faster and less expensive Chapter 11 reorganization path for small business debtors, it seems tailor-made for the current crisis. In addition, Congress responded to the effects of Covid19 by modifying the SubChapter V requirements so that a larger number of small businesses can utilize the benefits of this remedy.
What Type of Businesses Are Eligible?
Originally, in order to qualify for Subchapter V, a debtor (whether an entity or an individual) must be engaged in commercial activity and its total debts–secured and unsecured–had to be less than $2,725,625.00. After the passing the CARES Act in response to the effects of Covid19, Congress increased that limit to $7,500.000.00 This limit will revert back to the original limit on March 27,2021. At least half of those debts must come from business activity. The debtor’s principal activity cannot be a single-asset real estate operation. The debtor must elect to proceed under Subchapter V. Otherwise, the regular Chapter 11 rules apply.
The Process
The process is streamlined and designed to move along much more quickly than by traditional Chapter 11 standards. The Court will hold a status conference within 60 days from the filing. At least 14 days before that conference, the debtor must report in writing on the efforts made, and to be made, to get a consensual reorganization plan. The debtor must file its plan of reorganization within 90 days from the filing. Only the debtor may file a plan. This differs from a regular Chapter 11 where – if the debtor does not file a plan within a certain period — creditors or other parties in interest may file a plan.
A Subchapter V debtor need not file a disclosure statement. This is a regular Chapter 11 requirement designed to provide creditors with sufficient information to analyze and vote for or against the plan. In practice, it can lead to protracted disputes and delays as the parties argue over the adequacy of the disclosures. As an alternative to a disclosure statement, the plan must include a brief history of the business operations, a liquidation analysis, and projections demonstrating the ability of the debtor to make the proposed plan payments.
Usually, there will be no creditors’ committee – another cut to reduce time and expense.
Trustee
The court will appoint a trustee, but his or her powers are more limited than the powers a Trustee has in either a Chapter 7 or Chapter 13 case. The Subchapter V trustee does not take possession of a debtor’s assets and lacks the ability to sell those assets. The trustee is more like an advisor and handler whose job is to facilitate the development of a consensual reorganization plan, appearing at major hearings, and ensuring that the debtor makes timely payments under the plan. The debtor must pay the Subchapter V trustee.
Plan Confirmation
Another benefit of the Subchapter V Process is that a small business debtor can get a plan confirmed, even if it is not accepted by the creditors. This is a significant distinction from a standard Chapter 11 bankruptcy where the creditors get to vote on whether or not to confirm the plan. In a Subchapter V case, a plan will be confirmed if it does not discriminate unfairly and is fair and equitable. Creditors must still receive as much under the plan as they would if the small business were liquidated in Chapter 7. Subchapter V also includes an option for the debtor to contribute all “projected disposable income” to making plan payments for three to five years – much like a Chapter 13 plan. Projected disposable income is everything after expenses to maintain and support the debtor (or a dependent) and expenditures necessary for business operations.
To confirm the plan, the court must find (1) the debtor will be able to make all payments under the plan or (2) there is a reasonable likelihood that the debtor will be able to make all payments under the plan and the plan contains appropriate remedies to protect creditors if payments are not made as proposed.
Discharge
If the reorganization plan is consensual, the debtor will receive a discharge at confirmation. If the plan is not a consensual plan, the debtor will receive a discharge after making all of the plan payments.
Miscellaneous
The SBRA/Subchapter V contains many other provisions which are beneficial to small business debtors. These include changes to the “absolute priority” rule which makes confirmation of a more forgiving plan possible, and also allows a debtor to modify the rights of a creditor secured only by the debtor’s personal residence in some situations. Finally, it eliminates the mandatory obligation to file a disclosure statement.
The Subchapter V process is new to the bankruptcy courts, and is currently evolving as cases are filed and the bankruptcy courts rule on some of the issues which arise. Presently, it appears that the Courts are interpreting the law in a manner which is favorable to the small business debtor. If your business has sustained significant losses due to the effects of Covid19, but will continue to be viable in the future after the Covid19 restrictions are lifted, a SubChapter V reorganization might be the remedy to get your business back on the right track.
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