Subchapter V – A saving grace for small businesses
Updated: 3 days ago
The Small Business Reorganization Act (SBRA) was signed into law in August of 2019 and became effective in February of 2020, right before the COVID-19 Pandemic hit. When it was being written and signed, there was no way to know that in March of 2020, the world would come to a standstill with the COVID-19 Coronavirus Pandemic. For many small businesses, the timing of the SBRA could not have been better.
The SBRA is better known as Subchapter V of Chapter 11 of the Bankruptcy Code, and it has become a saving grace for many small business owners. Ironically, before Subchapter V, many small businesses and small business owners were too poor to afford to go through the Chapter 11 process. Subchapter V makes the process less expensive and much faster.
In a typical Chapter 11 proceeding, administrative expenses must be paid at plan confirmation, which could be prohibitive for small businesses. With Subchapter V, costs may be paid over the life of the repayment plan. In comparison to a Chapter 13 bankruptcy, a Subchapter V bankruptcy sets up a program where debts can be paid over the course of a 3 to 5-year plan. The benefits of this are that a small business may continue to operate, devoting its projected disposable income to paying creditors, and creditors have a greater chance of collecting a higher percentage of what they are owed. Additional benefits of a Subchapter V are as follows: (a) the automatic appointment of a standing trustee who oversees and assists in the proposal and confirmation of a plan, (b) only the debtor is allowed to propose a plan unlike in a traditional chapter 11, (c) there is no unsecured creditors committee unless the court orders one to be formed for cause, (d) the debtor’s owners are allowed to retain their interest in the debtor without the requirement of paying the unsecured creditors in full, unlike a traditional chapter 11, and (e) owners of the debtor who took out mortgages on their homes to fund the business, can modify those mortgages.
Subchapter V is not available to all businesses. There are limitations and guidelines. When the SBRA was passed, the debt could not exceed $2,725,625. This debt cap was temporarily increased to $7,500,000 as a part of the CARES Act.
The COVID-19 pandemic has caused many businesses that were perfectly healthy to falter in just a matter of weeks. Other companies were able to hold on, but the pandemic's extended period has caused more businesses to seek bankruptcy protection. That number will continue to increase over the next few months.
If you own a small business and you are struggling to keep up with your debts, it may be time to have a serious discussion about Subchapter V to see how it can help give you and your business a fresh start.