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Small Business Bankruptcy
Subchapter V

Effective February 19, 2020, Congress enacted new legislation granting debtors the option to elect a new subchapter V of chapter 11 of the bankruptcy code (Subchapter V). This was made possible by the legislation known as the Small Business Reorganization Act of 2019 (SBRA). Small Business Reorganization Act (SBRA) of 2019, Pub. L. No. 11654, 133 Stat. 1079. The SBRA was enacted to provide “small business debtors,” defined in § 101 (51D) as a person

  1. Engaged in a commercial business activity, excluding the ownership of single asset real estate as defined in 11 U.S.C. §101 (51B),
  2. Non-contingent liquidated secured and unsecured debt as of the date of the filing of the petition not more than $2,725,625.00 (excluding debts owing to affiliates and insiders), and
  3. The majority of such debts must have arisen from the commercial or business activities of the debtor.

 

Additionally, the debt cap was then increased to $7,500,000 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 (effective March 27, 2020 for the period of one year).

The combination of these two pieces of legislation provide the opportunity for small business debtors to reorganize in a cost-effective manner.

ADVANTAGES OF SUBCHAPTER V

1. Voting Is Not Necessary to Confirm Plan

The Debtor may confirm a cramdown plan without the approval of any class of creditors. (Compared to a normal Ch. 11 which requires that the debtor receive the acceptance of at least one class of impaired class.

2. Elimination of Absolute Priority Rule

In a regular Chapter 11, a dissenting class of unsecured creditors must be paid in full before any junior class can receive or retain property under a plan of reorganization. This means that if the unsecured creditor class votes to reject a Ch. 11 plan, the owners cannot receive anything unless the dissenting class is paid in full.

Now, so long as the Debtor applies all his/her disposable income to the Plan for a period of three to five years, a court may confirm a plan over the objection of unsecured creditors. Removing this hurdle allows small business owners to continue managing their business and enjoy the benefits of ownership.

3. Only the Debtor Can File a Plan

Under a Subchapter V, creditors or other interested parties are not permitted to submit plans of reorganization as they are under a regular Chapter 11.

4. Reduced Expenses

Debtors are no longer required to pay U.S. Trustee fees nor is there a requirement for the appointment of an official committee of unsecured creditors.

5. Easier Retention of Counsel

An attorney may represent a Debtor in a Subchapter V notwithstanding the existence of unpaid prepetition fees in the amount less than $10,000. Previously, the Bankruptcy Code required Debtor’s counsel to be a disinterested party, which effectively required fees to be paid in full before filing a bankruptcy provision.

6. Modification of Certain Mortgages on the Debtor’s Principal Residence

Debtors are able to modify security interests in the debtor’s principal residence when the proceeds were used primarily in connection with the debtor’s business.

7. Post-Confirmation Plan Modifications

In a normal Chapter 11, the U.S. Trustee or the holder of an allowed unsecured claim is permitted to seek a modification to increase the amount of payments, extend the time-period for such payments, or alter the amount of distribution to a particular creditor anytime before the completion of plan payments. However, in a Subchapter V, only the debtor may seek to modify the plan after confirmation.

8. Debtors Are Permitted to Modify Liens on Motor Vehicle Loans

If a Debtor qualifies for either a Chapter 13 or Subchapter V, he/she may want to consider filing a Subchapter V as the Code has eliminated the prohibition against cramming down a secured personal motor vehicle loan incurred within 910 days prior to filing bankruptcy.

4000 Legato Road, Suite 1100

Fairfax, Virginia 22033

PHONE: (571) 303-9102

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