Subchapter V of Chapter 11 Bankruptcy for Business

Posted on Saturday, June 1st, 2024 at 9:00 am    

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As a business owner, you pour your heart and soul into your company, striving for success and financial stability. However, sometimes unforeseen circumstances or economic downturns can lead to overwhelming debt, leaving you struggling to keep your business afloat. When faced with this challenging situation, it’s important to know you have options. One potential solution is filing for bankruptcy under Subchapter V of Chapter 11, a relatively new addition to the bankruptcy code designed specifically for small businesses.

What Is Subchapter V of Chapter 11?

In 2019, Congress enacted the Small Business Reorganization Act (SBRA), which created Subchapter V of Chapter 11 bankruptcy. This new provision aims to streamline the bankruptcy process for small businesses, making it more accessible, cost-effective, and efficient. Subchapter V simplifies the requirements and procedures for small businesses seeking to reorganize their debts and continue operating.

Eligibility for Subchapter V

Your business must meet specific criteria to qualify for Subchapter V. First, your secured and unsecured total debts must be at most the Subchapter V debt limit, currently set at $7.5 million. This limit will sunset in 2024 and return to approximately $3 million, so it’s essential to consult a business bankruptcy attorney to understand the current requirements.

Additionally, at least 50 percent of your debt must have arisen from commercial or business activities. If most of your debt is personal, such as mortgages or car loans, you may not be eligible for Subchapter V.

Advantages of Subchapter V

Subchapter V offers several advantages over traditional Chapter 11 bankruptcy:

  • Streamlined Process – Subchapter V simplifies the bankruptcy process by eliminating the requirement for a creditors’ committee and allowing the business owner to retain control as the debtor-in-possession.
  • Reduced Costs – Subchapter V can significantly reduce the costs of filing for bankruptcy by providing a more streamlined process and fewer administrative requirements.
  • Faster Timeline – Subchapter V cases typically move more quickly than traditional Chapter 11 cases, allowing businesses to emerge from bankruptcy and continue operations sooner.
  • Flexibility – Subchapter V provides more flexibility regarding the debt repayment plan, allowing small businesses to restructure their debts in a way that better suits their unique circumstances.

The Role of the Trustee

In a Subchapter V case, the court appoints a trustee to oversee the process and ensure the business remains on track. The trustee’s role is to facilitate the development of a fair and feasible debt repayment plan, monitor the business’s progress, and distribute payments to creditors. While the trustee plays a significant role, the business owner retains control over day-to-day operations and decision-making.

Developing a Repayment Plan

One key component of Subchapter V is the development of a debt repayment plan. The business owner has 90 days from the filing date to propose a plan that must be fair and equitable to creditors while allowing the business to continue operating.

The repayment plan can include restructuring debt, modifying payment terms, and paying some creditors less than the full amount owed. However, the court must approve the plan and demonstrate that it is in the best interest of the creditors.

Benefits for Business Owners

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Subchapter V offers several benefits for small business owners seeking to reorganize their debts and continue operating:

  • Retention of Ownership – Unlike traditional Chapter 11, Subchapter V allows business owners to retain ownership and control of their company, even if they cannot fully repay their debts.
  • Discharge of Debts – Upon completing the repayment plan, any remaining unsecured debts can be discharged, providing a fresh start for the business.
  • Protection from Creditors – Filing for Subchapter V activates an automatic stay, which prevents creditors from pursuing collection actions, foreclosures, or lawsuits against the business. 

Understanding the Subchapter V Process

While Subchapter V offers many advantages for small businesses, the bankruptcy process can be complex and confusing. Working with an experienced bankruptcy attorney will help ensure you meet all requirements, develop a viable repayment plan, and successfully emerge from bankruptcy.

At Bradford Law Offices, our knowledgeable bankruptcy attorneys are dedicated to helping small business owners find the best solution for their financial challenges. We understand Subchapter V and can guide you through the process, protecting your interests and working towards a brighter future for your business.

If your small business is struggling with overwhelming debt, contact Bradford Law Offices today at (919) 758-8879 to schedule a free consultation. Our knowledgeable and experienced attorneys will evaluate your situation, explain your options, and help you determine if Subchapter V of Chapter 11 bankruptcy is the right choice for your business. Take the first step towards financial recovery and securing a prosperous future for your company by calling us today.

Written By: Danny Bradford Last Updated: June 17, 2024