Congress passed the Small Business Reorganization Act of 2019, which was effective February 19, 2020. Subchapter V “). For many years, small, financially troubled businesses couldn’t use Chapter 11 as large companies could. The process was too costly, too long, and simply too difficult. SBRA provides small businesses with the same benefits as larger Chapter 11 debtors. It reduces liabilities, rejects burdensome leases and executory agreements, eliminates debts, and allows them to sell assets. Subchapter V introduced substantive and procedural changes in the Code to simplify the Chapter 11 process for small businesses. It streamlines the plan of restructuring process to allow small businesses to emerge from bankruptcy with a court approved plan within 90 days.
Subchapter V’s most important changes and benefits include
1. Requirement to file the Plan of Reorganization
Except as ordered by the bankruptcy court, Subchapter V creditors are not required to submit a Chapter 11 disclosure statement. Unless ordered by the bankruptcy court for cause, a Subchapter V debtor is not required to file a Chapter 11 disclosure statement.
Generally, a Subchapter VI requires that a debtor file a plan within 90 calendar days of entering bankruptcy. This is absent any showing of “exceptional circumstances” The SBRA allows for a shorter time frame to file a Plan:
A status conference will be held by the bankruptcy court within 60 days of the bankruptcy filing “to expeditious, economical resolution of any case under this subchapter.”
* The bankruptcy counsel for the debtor must file a report detailing the steps taken by the company and its advisors to reach a consensual plan.
* The Chapter 11 plan must be filed within 90 days of the bankruptcy filing unless the debtor asks for an extension due to circumstances beyond its control.
span style=”color”: #000000 ;”>* A Subchapter V debtor can only file a Chapter 11 plan. This restriction allows Subchapter V creditors to focus on their plan and not be distracted by any competing plans.
The debtor who follows the plan and makes all the payments will be discharged from all pre-confirmation loans.
Subchapter 5, which is similar to a Chapter 13 case for individuals who have regular monthly income, allows small business debtors to spread their debt over 3 to 5. This benefits both creditors (by allowing them the ability to spread out payments over time) as well as debtors (by allowing them meaningful recovery from debtors with less money but a realistic expectation of higher income in future). The bankruptcy court will usually approve a plan of reorganization as long as it includes provisions that the plan will use all of the debtor’s projected disposable income for the next 3 to 5 year period. Or the amount of property that will be distributed under the 3-5 year plan. This must not be less than the projected disposable income. Administrative expenses in a traditional Chapter 11 case must be paid at plan confirmation. However, they can be paid over the course of the plan’s life under Sub-Chapter 5.
2. Subchapter V eligibility: Recent Adjustments and Debt Amount
Subchapter V eligibility requires that a debtor (1) meets the criteria for a “small-business debtor” and (2) choose to be treated under Subchapter V. . . that includes aggregate non-contingent liquidated secured or unsecured debts . . Amount not exceeding $2,725,625 (excluding debts owed by 1 or more affiliates and insiders). Not less than 50% of which were derived from the commercial or other activities of the debtor .”
The temporary increase in the debt limit for this section of the Bankruptcy Code was part of the Coronavirus Aid, Relief and Economic Security Act (2020) and will last until March 27, 2021. This increased allowed for larger companies with substantial contingent and unliquidated liabilities that could otherwise have to reorganize under traditional Chapter 11 provisions to be eligible for Subchapter V’s more relaxed standards. The COVID-19 Bankruptcy Extension Act was passed by Congress on March 27, 2021. This extended the debt limit provision to March 27, 2022. Although Congress didn’t act immediately, Congress passed the COVID-19 Bankruptcy Relief Extension Act on March 27, 2021. This extended the increased debt cap provision through March 27, 2022. On June 7, 2022 Congress passed the Bankruptcy Threshold adjustment and Technical Corrections Bill, which retroactively restored the $7.5 Million debt threshold for two additional years. Subchapter V, which allows a larger number of small and medium-sized businesses to reorganize, will continue to be an option until June 2024.
3. Modification to the absolute priority rule
Small business owners have the option to keep their ownership in the reorganized corporation through the SBRA. The “absolute prior rule” in Chapter 11 bankruptcy states that existing creditors cannot retain their equity interest in debtors unless they object to the creditors in full. A Subchapter V case is different. As long as the plan stipulates that creditors will receive the debtor’s “disposable earnings” for three years, or up to five years, if extended by bankruptcy court. Equity holders of Subchapter V debtors may still own and manage their businesses, even if unsecured creditors are paid a small amount and vote against it or object to confirmation.
4. Changes in Administrative Expenses, and Reduced Creditor Involvement
Subchapter VI states that an official committee made up of unsecured creditors cannot be appointed unless the bankruptcy court has given cause.
Subchapter V creditors are exempt from paying quarterly United States Trustee fees. They may also be allowed to pay administrative expense claims during the term. Contrary to traditional Chapter 11 cases where the debtor must pay administrative expenses claims at the effective date or in the normal course of business, the debtor in Subchapter V cases is exempted from paying them. Subchapter V bankruptcy debtors can amortize some of their bankruptcy filing costs.
5. Mortgage Protection and Modification
Small business owners often have to sacrifice their home to get start-up financing. If the owner of a small business used their primary residence to secure a loan for financing the business, the debtor may seek to modify the mortgage against that primary residence provided the mortgage loan was not used to purchase the real estate but was used solely to support the business.
6. Appointment as a Standing Trustee
A Chapter 11 trustee can only be appointed for cause in a Chapter 11 bankruptcy. Sub-Chapter V allows for an automatic appointment of a “standing trustee”, but the debtor retains full control over its assets and operations. The Sub-Chapter V trustee functions in the same way as the trustee for Chapter 13 individual debtor bankruptcy. The Sub-Chapter V trustee is similar to a mediator in that its main function is to facilitate a mutually agreed upon plan between the debtors and their creditors. This can be useful in reaching a settlement between the debtors and their creditors. It may also be beneficial for small businesses whose creditors are not willing to make reasonable concessions due to the imminent financial crisis.
Subchapter V can be a powerful tool to help small businesses reorganize more economically without having to deal with the significant hurdles of confirmation that traditional Chapter 11 cases impose. Subchapter V is now available to a wider range of businesses until June 2024 due to recent changes to the debt threshold.
Ghandi Deeter Blackham Law Offices is founded by Nedda Ghandi. Ghandi, a Nevada native, graduated from the University of Nevada, Las Vegas William S. Boyd School of Law. She has been practicing law in Las Vegas since 1999. Ghandi has published numerous articles on interesting developments in law and has been named a member Nevada’s Legal Elite since 2013 and a Super Lawyer each year. Ghandi DeeterBlackham is a specialist in family, bankruptcy, guardianship and probate. Consultations can be made by calling 702.878.1115, or visiting www.ghandilaw.com Nedda Ghandi Esq. is the founder partner of Ghandi Deeter Blackham Law Offices. Ghandi, a Nevada native, is a graduate of University of Nevada, Las Vegas William S. Boyd School of Law. She has been practicing law in Las Vegas for nine years. Ghandi has published numerous articles on interesting developments in law and has been named a member Nevada’s Legal Elite since 2013 and a Super Lawyer each year. Ghandi DeeterBlackham is a specialist in family law, bankruptcy and guardianship. You can schedule a consultation by calling 702.878.1115, or visiting www.ghandilaw.com
The first Vegas Legal Magazine article was Subchapter V Benefits for Small Businesses.