Many businesses and individuals find themselves facing financial distress. The U.S. Bankruptcy Code provisions serve as a crucial framework for both individuals and businesses seeking a fresh start. Among the various pathways available, Subchapter 5 of the Bankruptcy Code has emerged as a vital tool. Subchapter V of Chapter 11 bankruptcies, often referred to as Subchapter 5, is specifically designed to streamline the bankruptcy process for small businesses. It was introduced by the Small Business Reorganization Act (SBRA) of 2019. This provision, tailored specifically for small business debtors, strikes a delicate balance between efficient debt reorganization and the protection of creditors’ rights. In effect, Subchapter 5 aims to streamline the bankruptcy process by offering a lifeline for small businesses that are profitable but struggling to meet their financial obligations.

Criteria To Be Met For a Subchapter 5 Bankruptcy

To be eligible for a Subchapter 5 bankruptcy, the following criteria need to be present:

Eligibility: Subchapter 5 is aimed at small business debtors. The business must be actively engaged in commercial activities. At least 50% of the business’s debt must originate from its business activities. Additionally, the total amount of non-contingent, secured, and unsecured debt should be less than $7.5 million as of 2023. The COVID-19 Bankruptcy Relief Extension Act of 2021 currently gives small businesses with noncontingent liquidated debts (excluding obligations to insiders and affiliates) that total $7.5 million or less the opportunity to take advantage of a Subchapter 5 reorganization. The qualifying debt limit was first increased from $2,725,625 to $7.5 million beginning on March 27, 2020, for one year under an amendment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to Chapter 11 of the U.S. Bankruptcy Code. Without the Extension Act, the $7.5 million debt limit would have expired on March 27, 2022. It currently is effective until June 21, 2024.

Reorganization Plan: Under Subchapter 5, small business owners can reorganize their debt and develop a plan to pay off the remaining debt without ceasing business operations. This process includes the ability to eliminate or restructure unsecured debt.

Unique Provisions: There are some distinct features of Subchapter 5 which make it more streamlined and affordable for small businesses, providing a more efficient way to handle debt and financial distress while maintaining operations. It removes some of the more complex and expensive requirements of a traditional Chapter 11 bankruptcy. Some of the unique and advantageous features are as follows:

  1. Streamlined Plan of Reorganization: The debtor must submit a plan of reorganization within 90 days of filing for bankruptcy. This plan details how the business will continue operations and pay its creditors. Unlike traditional Chapter 11, there is no requirement for a disclosure statement, which expedites the process.
  2. Trustee Appointment: A trustee is appointed to oversee the case, but unlike in Chapter 7 or Chapter 13 bankruptcies, this trustee does not take control of the business. Instead, their role is to facilitate the development of a consensual reorganization plan and oversee its implementation.
  3.  Debtor in Possession: The business owner can continue operating the business as a “debtor in possession”. This means they retain control of their assets and business operations during the bankruptcy process.
  4. No Creditors’ Committee: Typically, there is no committee of unsecured creditors, which is a standard feature in regular Chapter 11 cases. This omission reduces the complexity and cost of the bankruptcy process.
  5. Easier Plan Approval: Subchapter 5 offers a more debtor-friendly standard for confirming the reorganization plan. Creditors do not need to approve the plan as long as it is fair and equitable.
  6. Discharge of Debts: Upon confirmation of the reorganization plan, the debtor may receive a discharge of certain debts, providing a pathway to a fresh start while retaining their business.
  7. Modification of Personal Guarantees: Subchapter 5 may provide an opportunity for small business owners to modify personal guarantees on business debts, subject to certain conditions.
  8. Flexibility and Cooperation: The process emphasizes negotiation and consensus between the debtor and creditors, encouraging a collaborative approach to reorganization.

Subchapter 5 offers a more accessible and efficient path for small businesses to restructure their debts while remaining operational. It is designed to balance the interests of the business and its creditors, providing a more practical approach to small business bankruptcy. The law firm of Logan A. Weinkauf, P.C. can help you determine whether a Subchapter 5 Bankruptcy is right for your small business if you are in the throes of financial distress. Contact our firm for a free initial consultation to explore potential options if you need skilled advice concerning your business.

Weinkauf, P.C. provides experienced and tailored legal guidance and services to clients filing for SubChapter 5 bankruptcy throughout New Bedford, Mashpee, Cape Cod, and Bristol County MA.