Bankruptcy is a legal process that can provide relief to individuals and businesses overwhelmed by debt. The Small Business Reorganization Act of 2019 introduced Subchapter 5 of Chapter 11 to make bankruptcy more accessible to small businesses. This new subchapter is designed to streamline the bankruptcy process, reduce legal costs, and make it easier for small businesses to survive financial hardship.
As experienced Subchapter 5 bankruptcy attorneys, we understand the intricacies of this path and how it offers a lifeline to small businesses aiming to restructure their debt. Our role is to guide business owners through the complexities of the bankruptcy code, ensuring they can navigate the nuances of Subchapter 5 to achieve the most favorable outcome.
Subchapter 5 bankruptcy blends elements of Chapter 7 and Chapter 11 bankruptcies, aiming to create a more efficient process. It allows small business debtors to retain control of their operations as “debtor in possession,” while formulating a plan to pay creditors over time. We provide strategic advice to help clients reorganize their debts and move forward with a clear financial plan, taking into consideration the unique challenges small businesses face in today’s economic landscape.
Understanding Subchapter 5 Bankruptcy
Subchapter 5 Bankruptcy provides a streamlined process for small businesses to reorganize debt. It is designed to be less costly and more efficient than traditional bankruptcies.
The Basics of Subchapter 5 Bankruptcy
Subchapter 5 is a part of the United States Bankruptcy Code that was introduced to simplify the bankruptcy process for small businesses. This subchapter allows for a faster reorganization process under Chapter 11 of the Bankruptcy Code, which can be particularly beneficial during times of economic distress, such as the COVID-19 pandemic. The goal is to help small businesses negotiate with creditors and restructure their debts while keeping the business operational.
Advantages for Small Business Debtors
Small business debtors benefit from Subchapter 5 by being able to confirm a plan of reorganization without the need for creditor approval, as long as the plan does not discriminate unfairly and is fair and equitable. The process eliminates certain costly administrative expenses and creditor committees, and it allows owners to retain their equity without the “absolute priority rule,” a requirement in traditional Chapter 11 cases.
Eligibility Criteria and Debt Limit Considerations
To be eligible for Subchapter 5, a debtor must be engaged in commercial or business activities with non-contingent, liquidated secured and unsecured debts of less than $7.5 million—a threshold increased from $2.725 million by the CARES Act in light of the COVID-19 pandemic. At least 50% of those debts must have arisen from business activities. The increased debt limit is currently a temporary measure, and debtors should consult with a Subchapter 5 bankruptcy attorney to navigate the complexities of eligibility and filing.
Navigating the Subchapter 5 Bankruptcy Process
In navigating the Subchapter 5 bankruptcy process, it’s critical to comprehend the roles of key participants and the necessary steps for developing and confirming a reorganization plan. We’ll guide you through the actions involving attorneys and trustees, plan formation, and creditor interaction.
Role of the Bankruptcy Attorney and Trustee
In the Subchapter V bankruptcy process, our role as bankruptcy attorneys is twofold. First, we prepare and file your legal documentation, ensuring accuracy and adherence to Subchapter V of Chapter 11 bankruptcy requirements. Our second responsibility is to provide strategic guidance, helping you to navigate the complexities of the filing process. This includes representing you in court and in dealings with creditors.
The Trustee, appointed after filing, takes on an administrative role, facilitating the reorganization process and ensuring it progresses in an equitable manner. Their duties include overseeing the reorganization plan’s development, helping negotiate with creditors, and ultimately, administering plan payments.
Developing a Reorganization Plan
The development of a reorganization plan is a pivotal step in the Subchapter 5 process. We work closely with you to formulate a plan that will balance your ability to operate post-bankruptcy with the need to repay your creditors. This plan of reorganization must detail how unsecured creditors are to be handled and illustrate a path for the business to regain financial stability.
Key components of the reorganization plan:
- Business projections: Estimates of future income and expenses.
- Payment strategy: How unsecured creditors will be paid over time.
- Operational adjustments: Changes to operations to improve profitability.
Obtaining Creditor Approval and Confirmation
The final step involves securing creditor approval and confirmation of the reorganization plan by the bankruptcy court. Creditors may either consent to the plan, leading to a consensual plan, or they may voice objections, which we must address through negotiation or court hearings. Our objective is to achieve a plan that is fair and equitable to all parties involved.
To obtain approval from unsecured creditors, the plan must meet specific requirements:
- Feasibility: It must demonstrate that the business can meet its obligations.
- Best Interest of Creditors: It must ensure that creditors receive as much as they would under alternative bankruptcy chapters.
Confirmation by the court follows creditor approval, finalizing the reorganization and allowing the business to move forward under the terms of the new plan.
