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Understanding Chapter 11’s Subchapter V

| Jun 2, 2021 | Corporate Bankruptcy & Restructuring

The Small Business Reorganization Act of 2019 created a new subchapter within the Chapter 11 bankruptcy process. Subchapter V is designed to streamline the process for small businesses seeking the protections of Chapter 11. Signed into law in 2018 and going into effect in February of 2020, the act’s timeline has proved fortuitous for many businesses that suffered financial hardships from the global pandemic that hit at full force only a month later.

Making Chapter 11 work better

Before the SBRA went into effect, the Chapter 11 process was often too expensive and cumbersome for small businesses to take advantage of its benefits. Advantages of the new Subchapter V include:

  • A shortened timeline
  • Increased flexibility in working out payment plans with creditors
  • No need for creditor approval, as long as the bankruptcy court approves the payment plan
  • The guidance of a special bankruptcy trustee who will oversee the reorganization
  • The ability to pay administrative expenses over the life of the plan, not all at once

Chapter 11 bankruptcy provides usually larger companies with an opportunity to restructure or sell their businesses while staying creditor lawsuits and other legal actions. Subchapter V is designed to make these protections available to smaller businesses who once had to find other alternatives, such as filing for Chapter 7 bankruptcy or simply going out of business.

Who is eligible?

Not every business is eligible to file under Subchapter V. Among the requirements are:

  • The debtor company may not derive most of its income from operating single property, such as an office building or apartment complex.
  • The amount of debt must fall below a certain threshold. Originally, this limit was set at approximately $2.75 million but has been extended temporarily to $7.5 million
  • At least half of the debt must be incurred from business activities

If your business is struggling with debt, it is important to know your options. Whether Chapter 11 is right for you or not, you can benefit from the guidance of a bankruptcy attorney who knows the process and is also well versed in other debt-relief alternatives.