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Subchapter 5 Bankruptcy, introduced under the Small Business Reorganization Act of 2019, is designed to offer a lifeline to small businesses struggling with debt. By providing a more streamlined and cost-effective path to reorganization, it aims to preserve business operations and save jobs. However, like any legal remedy, it comes with its set of challenges and limitations.
In this post, our Massachusetts Chapter 11 bankruptcy attorney explores Subchapter 5 Bankruptcy, highlighting its benefits and drawbacks for businesses considering this option so you can make the most informed decision moving forward.
What is a Subchapter 5 Bankruptcy?
Subchapter 5 Bankruptcy is a solution offered under the U.S. Bankruptcy Code, specifically designed for small business debtors. Its primary aim is to simplify the bankruptcy process, making it more accessible and less burdensome for small enterprises facing financial difficulties.
Advantages of Subchapter 5 Bankruptcy
- Streamlined process: Subchapter 5 simplifies the bankruptcy process for small businesses, making it quicker and less burdensome. The requirements for detailed disclosures and reporting are reduced, and there are no Unsecured Creditors’ Committees unless the court orders otherwise, which can significantly lower legal and administrative costs.
- Cost-effectiveness: Small businesses can save time and money with fewer procedural requirements and no need for a disclosure statement. This efficiency is crucial for small enterprises that may not have the resources to endure a prolonged bankruptcy process.
- Debtor retains control: Unlike traditional Chapter 11 cases, where a creditors’ committee can play a significant role and sometimes challenge the debtor’s control, Subchapter 5 allows the small business debtor to retain control over its operations and assets as a debtor in possession.
- Easier plan confirmation: Subchapter 5 removes the requirement that a class of creditors must accept the plan for it to be confirmed. This debtor-friendly provision means that a bankruptcy court can confirm a plan over creditors’ objections if the plan does not discriminate unfairly and is fair and equitable.
- Extended time to pay administrative expense claims: Debtors can stretch the payment of administrative expense claims, including attorney fees, over the term of the bankruptcy plan, which can be up to five years. This provides significant cash flow relief early in the reorganization process.
- Private trustee oversight: A Subchapter 5 trustee is appointed to each case to facilitate the development of a consensual plan of reorganization, adding a layer of oversight that aims to assist, rather than control, the debtor in its reorganization efforts.
Disadvantages of Subchapter 5 Bankruptcy
- Debt limitation: Subchapter 5 is only available to small business debtors with secured and unsecured debts, subject to a limit of just over $2.75 million (the limit was temporarily raised to $7.5 million as part of COVID-19 relief measures, but this is subject to change in March 2024). This limitation excludes larger businesses that might still consider themselves “small” but exceed the statutory debt limit.
- Less flexibility: While the streamlined process can be an advantage, it also means that debtors have less time to negotiate with creditors and must adhere to a stricter timeline, which could potentially rush decisions or limit restructuring options.
- Financial affairs made public: Filing for bankruptcy under Subchapter 5 requires disclosure of detailed financial information in court filings, which become public. For some businesses, this transparency might be a deterrent due to concerns over privacy and competitive disadvantages.
- Limited Availability: Subchapter 5’s benefits are only available to entities that qualify as a “small business debtor.” This definition excludes certain types of businesses and those that exceed the debt threshold, limiting the applicability of these advantages.
Is a Subchapter 5 Bankruptcy Right for You?
The decision to declare Subchapter 5 Bankruptcy is not one to be taken lightly. Consulting with a bankruptcy attorney familiar with the ins and outs of federal bankruptcy laws and their consequences can help. Contact our office for a consult to learn more.