Historically, one of the primary obstacles for small and mid-sized businesses seeking relief from their debts was the high cost of a chapter 11 bankruptcy. The 2019 Small Business Reorganization Act enacted a special type of chapter 11 for small business under subchapter V, which generally reduces the costs and other burdens of chapter 11. However, subchapter V, like each type of bankruptcy, is not a “one size fits all” solution and businesses in distress should consult with an attorney to determine their options and best course of action.
Chapter 11 bankruptcy can be a great tool for companies or individuals in financial distress, permitting debtors to restructure their debts and emerge, reorganized, with manageable debt. However, a chapter 11 case can be very burdensome in terms of expense and the amount of time required of management to administer. In order to ease these burdens, Congress created the more streamlined subchapter V process for qualified debtors, with less procedural hurdles and certain means to reduce costs and/or extend such costs over a longer period of time.
In order to be eligible to proceed under subchapter V, a debtor must be an individual or entity engaged in business other than owning single asset real estate, and have less than $7.5 million in noncontingent, liquidated debt. There are currently varying interpretations of the requirement that the debtor be engaged in business (e.g. with respect to whether an entity no longer operating qualifies), so it is important to be familiar with your jurisdiction and its case law and practices.
For qualifying debtors, subchapter V, in many ways, eases confirmation of a bankruptcy plan, which is the roadmap of a debtor’s reorganization, governing the debtor’s obligations to its creditors going forward. First, each subchapter V debtor is assigned a trustee who acts more like a mediator, seeking to facilitate the debtor’s path to confirmation, than a traditional chapter 11 trustee. In subchapter V, only a debtor may file a proposed plan and the debtor need not file a disclosure statement with that plan or solicit votes. This enables debtors to avoid the substantial costs and time expenditure of preparing a disclosure statement and soliciting votes of creditors, as well as the potential costs of contesting a plan proposed by creditors and associated litigation risks. Of crucial importance to small business debtors, subchapter V removes the applicability of the “absolute priority rule,” thereby permitting debtors to retain property even if creditors are not being paid in full, provided that the streamlined requirements for confirmation are met.
While a subchapter V debtor, like a debtor in a traditional chapter 11, remains able to have a plan confirmed on consent of its creditors, in the event creditors oppose confirmation of the plan, a subchapter V debtor has an easier path to confirmation over such objections. A subchapter V debtor does not require any consenting creditor for plan confirmation, so long as the plan is fair and equitable in its treatment of creditors. This requirement can be met, in addition to other things, if the debtor’s plan provides for creditors to receive at least the value of the debtor’s disposable income over a three year period.
There are many additional benefits to a debtor in subchapter V over a traditional chapter 11, including, for instance, the ability to pay post-petition administrative expenses over time and to modify the rights of a creditor secured to the debtor’s real estate that is not an individual’s primary residence. In short, the subchapter V process seeks to strike a balance between maintaining creditor protection and making chapter 11 accessible to debtors who might otherwise might not be able to afford a traditional chapter 11 reorganization. Individuals or business owners facing issues with debt or liquidity should consult with a bankruptcy attorney to determine whether a bankruptcy could benefit them and if they are eligible for subchapter V bankruptcy.