If you are a business owner who’s facing financial stress, we tell you that there are several options for bankruptcy. Many business owners choose to file Chapter 7 bankruptcy, while others opt for Chapter 11, a section of the U.S. Bankruptcy Code designed specifically for businesses. This allows businesses to continue operating and reorganize, instead of closing down and liquidating their assets. Many small business owners find Chapter 11 to be cumbersome and costly. In response to these concerns, Congress added Subchapter V of Chapter 11 via the Small Business Reorganization Act of 2019 Subchapter V simplifies and makes filing for Chapter 11 easier.
In general, debtors who are in business and who have less than $7.50 million in secured and unsecured debts (as of 2023) of which half is from their commercial activities will be eligible. There is an exception for real estate businesses with a single asset.
Subchapter 5 Filing
The debtor must state specifically that they are filing under Subchapter V or else the bankruptcy will be treated like a standard Chapter 11 case. A debtor is required to submit their bankruptcy petition along with a balance statement, cash flow statements, and a statement of operations.
Subchapter 5 and standard Chapter 11 differ in that there is no disclosure statement. In a standard Chapter 11 bankruptcy, a debtor will be required to submit this disclosure statement to creditors so they can review the bankruptcy plan and vote on it. It can slow down the process by causing disputes between creditors and debtors. In place of disclosure, the debtor is required to provide a brief history of their business, a liquidation, and projections showing how they plan to keep up with payments under the bankruptcy plans.
A Subchapter 5 bankruptcy has a different timeline than the normal Chapter 11 process. The court will hold a Status Conference within 60 days of the filing date by the debtor. The debtor is required to submit a report in writing on the ongoing and planned efforts of the debtor to produce a consensus bankruptcy plan at least 14 days before the status conference. The plan of reorganization must be submitted within 90 days following the filing of the petition by a debtor. A debtor will need to act quickly to remain eligible.
The Role of a Trustee in Subchapter V
The bankruptcy court, as with Chapter 11 bankruptcy, will appoint an appointed trustee to oversee the bankruptcy under Subchapter 5. However, this trustee does not have control over the assets of a debtor and cannot sell them. The trustee’s role will be more passive, as he or she will help the debtor create their bankruptcy plan while collecting payments. The trustee will also appear at hearings throughout the process.
The Subchapter 5 Plan
In general, bankruptcy proceedings under Subchapter 5 do not require a committee. Another way to streamline the process is by eliminating the committee of creditors. In a Chapter 11 case, creditors would normally vote on the bankruptcy plan. However, under Subchapter V a debtor doesn’t need to ask creditors for approval. They still have to meet certain requirements to be approved by a court. The court will only approve the plan if creditors receive the same amount under the plan that they would have received if the company were liquidated in Chapter 7. The plan must also be fair and equitable. The court will only approve the plan if they find that the debtor can pay their debts, or that it’s reasonably likely that they will. Creditors will also be protected by the plan if the debtor fails to make their payments.
Subchapter 5 plans may require that the debtor use their entire projected income to pay their plan payments over a three- to five-year period. It involves allotting their financial resources for plan payments except those required to support them and their dependents as well as expenses to keep their business running. This plan is similar to a Chapter 13 bankruptcy plan.
Nonconsensual plans under Subchapter 5 will only lead to a discharge if all payments are made by the debtor. At confirmation, a consensual (approved by creditors plan) will result in a discharge.
Additional Rules under Subchapter 5
The Small Business Reorganization Act also contains several other provisions that can modify a debtor’s rights depending on the circumstances. If certain conditions are met, for example, the lien that is secured by a debtor’s residence can be avoided. The SBRA provides rules on claw-back actions. This occurs when a bankruptcy trustee or a debtor attempts to recover money from entities that received it before the filing. These rules protect certain types of creditors. A business owner might want to consult a bankruptcy lawyer before making a decision, given the many nuances in the SBRA and Subchapter V.
Ready to Take the Next Step?
If you are considering bankruptcy and have questions about paying creditors, consult Bruner Wright PA. We can help you understand your options and ensure that you approach the process in a way that protects your interests and complies with bankruptcy laws. Remember, the goal of bankruptcy is to give you a fresh start, so it’s crucial to navigate the process carefully and strategically
Contact Bruner Wright PA today! Our expert team will guide you through your options, help you understand bankruptcy laws, and develop a strategy tailored to your needs. Don’t face this challenging process alone—reach out now and secure your financial fresh start!