Effective in early 2020, the Small Business Reorganization Act (SBRA) added Subchapter V (5) to the U.S. Bankruptcy Code. Subchapter 5 bankruptcy makes it easier and less expensive for small businesses filing and restructuring through Chapter 11. At least 50% of total debt owed must be business-related (not personal bankruptcy) and single-asset debtors are excluded from Subchapter 5.
Eligibility for Chapter 11, Subchapter 5 dictates that small businesses must have less than a total of $2,725,625 in qualifying unsecured and secured debts. Secured versus unsecured debt in bankruptcy refers to whether collateral backs up the loan. Unsecured loans are issued by lenders or creditors based on the credit score of the borrower with no collateral. These may be in the form of loans from a bank or line of credit and typically have higher interest rates compared to secured debts. Secured debts have an asset held as collateral backing up the loan. Physical assets such as cars or property belong to the lender should payments not be made.
Due to the recent coronavirus pandemic and its effects on the economy, the debt threshold has been raised to $7,500,000 as part of Title I, Section 1113 of the CARES Act. The debt threshold increase is temporary and will return to $2,725,625 in March of 2021. This greater threshold extends Subchapter 5 benefits to more business owners struggling to repay their loans or debts. Amendments to the bankruptcy act were enacted in March of 2020 as a national debt relief and disaster relief program.
How Does Chapter 11 Subchapter 5 Make Bankruptcy Easier?
The higher debt threshold makes it easier for small businesses to reorganize under Chapter 11 without permission from certain creditors and lenders. Creditor committees are no longer a component of filing Chapter 11 bankruptcy under Subchapter 5 (unless stated otherwise by the bankruptcy court). Many insolvent small business owners were previously challenged by the costs of a creditor committee. By eliminating committees from the bankruptcy process, small businesses bankruptcies are expedited and less expensive.
Real and personal property were, at times, considered part of the debtor’s assets under the absolute priority rule of Chapter 11. However, the absolute priority rule has been abolished under Subchapter 5 benefiting individual debtors declaring Chapter 11 bankruptcy.
Subchapter 5 bankruptcy promises shorter bankruptcy process deadlines for faster reorganization. For example, bankruptcy courts must hold a status hearing within 60 days of filing. Negotiations with lenders or creditors to secure reorganization under the bankruptcy laws should be more flexible and forgiving. As well, Subchapter 5 allows for a private bankruptcy trustee to develop the reorganization plan between the debtors and creditors. Private trustees are appointed by the U.S. Trustee. This means U.S. Trustee quarterly fees are tempered and reduce the cost of filing.
Previously, creditors prepared and proposed a bankruptcy repayment plan for unpaid debts. Debtors filing bankruptcy under Subchapter 5 are now permitted to propose their own repayment plan during bankruptcy proceedings, which is included in other types of bankruptcy including Chapter 12 and Chapter 13 bankruptcy. A reorganization plan must be filed within 90 days of the entry for relief. Under very unique and extenuating circumstances, an extension for reorganization plan submission may be granted. Bankruptcy debt repayment plans shall be between three and five years in length.
How Can Ivey McClellan Help Me File Under Chapter 11 Subchapter 5?
Insolvent small business owners and individuals seeking debt relief from financial problems should consult with proper counsel. Subchapter 5 bankruptcy grants many liberties to individuals struggling with debt and considering bankruptcy. Such benefits include an easier, faster, and less expensive bankruptcy process.
Borrowers and debtors have many options for declaring bankruptcy. It is important to understand which approach is best for your business. Filing bankruptcy is a serious decision requiring an experienced, trustworthy team of attorneys. For questions about Chapter 11 Subchapter 5 bankruptcy, contact the bankruptcy lawyers who can help you today.