Small businesses form the backbone of the American economy and provide jobs to 48% of the workforce. Operating a successful small business was a challenge even before the business climate became dominated by the effects of COVID-19, the disease caused by the new coronavirus. Efforts to slow the spread of the disease, such as shelter-in-place orders coupled with temporary business closures or limitations on operations have created even more challenges for many business owners.
If your business is struggling to meet its financial obligations, the Small Business Reorganization Act of 2019 offers a streamlined reorganization process through Subchapter V of Chapter 11 of the Bankruptcy Code. Although it predates the pandemic, Subchapter V may be the ideal solution for a small business owner confronted with financial distress brought on by COVID-19.
Small Business Reorganization Act of 2019
When Congress enacted the Small Business Reorganization Act of 2019, it included a provision creating a less costly and faster business reorganization process under Chapter 11 of the Bankruptcy Code. Subchapter V of Chapter 11 is designed specifically for small businesses in need of debt relief. Although it was created in August 2019 with an effective date of February 19, 2020, Subchapter V comes at the right time for small businesses in need of bankruptcy protection to meet the challenges of COVID-19.
Business debtors generally have either Chapter 7 or Chapter 11 as options when they need debt relief through bankruptcy. Unless a business owner intends to liquidate its assets to pay creditors and cease operations, which must be done under Chapter 7, Chapter 11 becomes the only viable option. Chapter 11 allows a debtor to continue its business operations while restructuring its financial obligations under the supervision of the bankruptcy court, a committee of creditors and a trustee. Subchapter V reduces the cost of reorganization and simplifies the process for small businesses.
Businesses eligible for relief under Subchapter V
In order to be eligible to file for reorganization under Subchapter V, a business cannot have debt in excess of $2,725,625. The Coronavirus Aid, Relief and Economic Security Act contains a provision making Subchapter V protection available to more small businesses by increasing the debt ceiling for eligibility to $7,500,000. The increase in the debt ceiling reverts to its original SBRA amount one year from the effective date of the March 27, 2020 effective date of the CARES Act.
Process of a Subchapter V reorganization
The trustee in a small business reorganization under Subchapter V takes an active role in assisting the debtor in the preparation of a plan, but the trustee does not take control over the assets and management of the business. The business continues its operations under the control and management of the debtor both during and after the bankruptcy.
Debtors in a typical Chapter 11 bankruptcy must pay the fees of the trustee. Subchapter V reduces costs for small businesses by not imposing the trustee fees on debtors.
One of the ways that Subchapter V streamlines the processing of a reorganization for a small business is by not requiring appointment of a committee of creditors. The reorganization process moves along much quicker than in a normal Chapter 11 bankruptcy because the plan need not be approved by a committee of creditors.
A Subchapter V plan must be filed by the debtor with the bankruptcy court within 90 days from the commencement of the bankruptcy. A plan must include the following in order for the bankruptcy court to approve:
It must be fair and equitable.
It may not unfairly discriminate against creditors.
It must apply all of the disposable income the debtor is projected to earn toward payments to creditors for three to five years after approval of the plan.
Unless the court is convinced that a debtor is capable of making the payments called for under the plan, it will not approve it.
A debtor complying with the terms of its Subchapter V reorganization plan comes out of the bankruptcy in full control over the small business. Balances of debts not paid under the terms of the plan are discharged.
Benefits of a Subchapter V reorganization
Elimination of mandatory appointment of a committee of creditors and allowing the debtor to remain in control of the assets and operation of a small business. This streamlines the process and does not impose trustee control over the business as occurs in the typical Chapter 11. A consultation with a bankruptcy attorney about a Subchapter V reorganization may offer insight into how it may benefit your small business.