In February 2020, the Small Business Reorganization Act (SBRA) went into effect, opening up a new avenue for small businesses to seek relief under the U.S. bankruptcy laws in a more streamlined approach than the current process for large Chapter 11 cases. This new section of Chapter 11 is called Subchapter 5 (or Subchapter V).
Basically, Subchapter V provides debtors with an opportunity to reorganize more quickly and typically at a reduced cost—no more U.S. Trustee or Bankruptcy Administrator quarterly fees and no more Unsecured Creditors Committees to add to the administrative expenses.
Debtors are required to file a plan of reorganization within 90 days of the petition date and only a Subchapter V debtor can propose a plan. However, perhaps the most important difference in a Subchapter V case compared to a regular Chapter 11 case is that the debtor’s owner or owners may keep their equity in the business under a confirmed plan.
Usually, in a standard Chapter 11 bankruptcy case, the debtor must propose a plan that does not violate the absolute priority rule. This means that the owners cannot keep their equity in the company unless they propose a plan that will pay 100% of the debt owed to its creditors. Because 100% cases are rare in Chapter 11, it stands to reason that business owners who want to keep their interest in the company might shy away from Chapter 11.
Subchapter V introduces a way for corporations to reorganize while the shareholders or corporate members continue to control their voting and economic interests in the company.
Who is eligible for Subchapter V?
There are 3 basic eligibility requirements for Subchapter V:
1. Debt limit
When the SBRA went into effect, businesses with approximately $2.7 million in debts, or less, were permitted to take advantage of this new facet of the Bankruptcy Code. However, in response to COVID, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law, increasing the debt limits for Subchapter V cases up to $7.5 million.
More importantly, the $7.5 million cap does not include debts owed to insiders. So, shareholder loans to the company can be removed from the calculation for eligibility purposes.
2. Engaged in commercial or business activity
The debtor must be engaged in commercial or business activity. However, there is no requirement that the debtor remain engaged in the commercial or business activity post-petition. So, the company can cease operating and seek to liquidate assets to pay creditors or the individual owners may be eligible to file a Subchapter V case personally, as long as 50% of the pre-petition debt is attributable to business debt.
3. No single asset real estate
The only excluded activity for the small business debtor is operating “single asset real estate”. So, an apartment building or shopping center owner would probably be excluded from filing under Subchapter V.
What are the benefits of a Subchapter V case?
No disclosure statement
In standard Chapter 11 cases, a disclosure statement is required which is often costly to prepare and time consuming. Under Subchapter V, no disclosure statement is required. The plan should include a brief history of the business operations, a liquidation analysis and future disposable income projections to support feasibility of the plan.
Subchapter V trustee
A Subchapter V trustee is appointed to your case to help facilitate a consensual plan of reorganization. The trustee is not tasked with investigating the debtor and they do not have the avoidance powers of a Chapter 7 trustee. The role of the trustee is to supervise and monitor your case while participating in the development and confirmation of a plan.
Mortgage cram-down
Subchapter V enables an individual debtor to cram-down debt on homes they mortgaged to help fund their business. An individual who qualifies as a small business debtor can modify the mortgage on his or her principal residence, provided that the mortgage loan was not used to acquire the real property but was used primarily in connection with the business.
Cram-down confirmation
A Subchapter V debtor can propose a plan that is not accepted by any creditors. This is known as a “non-consensual plan.” Normally, in Chapter 11, at least 1 impaired class of creditors must accept the plan for it to be approved. In Subchapter V, as long as the plan does not discriminate unfairly, and is “fair and equitable” with respect to each impaired class that has not accepted it, the plan may still be confirmed.
What is “fair and equitable”?
- The debtor must commit all of its “projected disposable income” or property of equivalent value to make payments under the plan for 3-5 years.
- Debtor must demonstrate a “reasonable likelihood” that it will be able to make all payments under the plan and the plan must provide “appropriate remedies,” which may include the liquidation of nonexempt assets to protect creditors if the debtor fails to make plan payments.
If a non-consensual plan is confirmed, the trustee makes disbursements to creditors unless the court orders or plan provides otherwise. The debtor obtains a discharge after payments are completed in 3-5 years.
Why consult a Chapter 11 bankruptcy attorney?
If you are struggling to pay your debts and concerned about the future welfare for you and your family, it is important that you seek the advice of an experienced Birmingham Chapter 11 bankruptcy lawyer to ensure that your assets are protected and the debts you seek to eliminate are dischargeable.
Steven D. Altmann has been a lawyer for more than 25 years. He has earned an AV rating from Martindale-Hubbell’s peer-review rating and was recently named a Super Lawyer and Top Attorney by Birmingham Magazine in the area of Bankruptcy Law.
At The Nomberg Law Firm, our attorneys have been assisting consumers and business owners with bankruptcy matters for over 25 years. If you are considering filing for bankruptcy, please consider contacting us to schedule your free consultation.