After nearly two years of Covid-19 struggles, many small businesses are trying to get back on track to profitability. When businesses think of bankruptcy, however, they usually think they’re going out of business – that is not always the case. Congress created Chapter 11 bankruptcy for businesses that could remain profitable if they only had some breathing room to get back on track. In 2019, Congress added the Subchapter V of Chapter 11 of the U.S. Bankruptcy Code to give businesses the lifeline that they need to stay afloat.1 Subchapter V can extend out payments to give the business better cash flow month to month, it can reduce the overall amount the business owes, or it can even lower interest rates. All of this is done while the business continues to operate. At the end of the bankruptcy proceedings, the business is allowed to emerge completely intact. Because Subchapter V is new, many attorneys don’t have any experience in dealing with this new type of bankruptcy. Luckily, the attorneys at Gordon, Delić & Associates have the experience as they’ve successfully navigated the waters with Subchapter V.
Subchapter V vs. Regular Chapter 11 Bankruptcies
Subchapter V is a less intimidating process for small businesses when compared to regular Chapter 11 bankruptcy. Its focus is to assist small businesses that may not be able to utilize the relief offered in a typical Chapter 11.2 A Subchapter V is less expensive, faster paced, and it can result in a confirmed plan of reorganization faster than a normal Chapter 11; however, it still offers the same benefits as any Chapter 11 case, including protection from creditors, rejection of leases and executory contracts, and the elimination of debt. In addition, in Subchapter V, there is no committee of creditors and voting requirements. Instead, business owners maintain their equity and control, owners are the only ones who submit a debt repayment plan, and the bankruptcy court can confirm the business reorganization plan without creditor approval.
Commencement of a Case
Upon filing, a Subchapter V Trustee is appointed. Rather than being adversarial like in a typical Chapter 11 proceeding, the Subchapter V Trustee assists in an advisory capacity working alongside the debtor, appointed counsel, and creditors. The Trustee can also help with developing a plan to repay creditors and act as a mediator in case of any disputes between the debtor business and its creditors. The trustee’s statutory duty is to “facilitate the development of a consensual plan of reorganization,” by working with all parties toward a successful reorganization of a struggling business.
In a typical Chapter 11 case, the debtor is required to make quarterly payments to the U.S. Trustee. Subchapter V has eliminated these fees, in turn, allowing a debtor to pay more to their unsecured creditors, resulting in a more affordable monthly payment and a lower cost overall. Subchapter V has eliminated the need for creditors to vote on a proposed plan and the Disclosure Statement is no longer required. A Disclosure Statement provides information regarding the business to creditors so they can vote to either accept or reject the debtor’s Plan of Reorganization. This is a cumbersome and time-consuming process. In Subchapter V, there is no hearing to accept or reject the Disclosure Statement, and no need to wait for creditors to vote. These changes allow the case to move along quickly.
The expedited timeframe has several statutory deadlines. These deadlines include a status report and conference, and the submission of a Chapter 11 Plan, which is due within 90 days of filing the bankruptcy petition. In addition to these deadlines, monthly operating reports are due each month.
Confirmation of the Chapter 11 Plan is pivotal in a successful reorganization. Based on a business’s projected disposable income, the Plan must show three to five years of monthly payments. Creditors are separated into classes, and those classes determine how they will be repaid. These payments are then disbursed to creditors to satisfy pre-petition debts. Confirmation of the Chapter 11 Plan can be achieved by showing fair and equitable treatment to all creditors.
Although Subchapter V simplifies bankruptcy for small businesses, there are still eligibility requirements. A business making the election to file under Subchapter V must be a “small business debtor”, meaning they must be actively engaged in commercial or business activities and have an aggregate debt of no more than $2.75 million. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, expanded Subchapter V eligibility to $7.5 million until June 21, 2024. Any single-asset real estate business does not qualify.
Call Gordon, Delić & Associates
Small businesses seeking relief from financial difficulties should consult with a knowledgeable attorney. If documents are not filed correctly, or in the right order, the bankruptcy court could end up appointing the Trustee to run the business rather than help facilitate a plan. The attorneys at Gordon, Delić & Associates can meet with you to determine your options, eligibility, and help you move your business forward into a successful future. We have helped businesses navigate the treacherous waters of Subchapter V.
Most recently, our attorneys helped a struggling local business that was straddled with predatory debt from COVID-19 by readjusting the payment terms to free up cash for inventory each month. The business is now thriving and growing faster than ever. Without the cash flow, the business would have most likely ceased operations. The attorneys at Gordon, Delić & Associates know that small businesses are a wonderful dream for some people and we want to keep that dream alive and thriving.
If you have a business that needs some breathing room, call Gordon, Delić & Associates. We would love to help!