Chapter 11 Subchapter V has redefined the process of small business bankruptcies. Learn what's changed (and how Protect Law Group can help) in this guide.Book a Consultation Call
Since the pandemic exploded across the United States in March of 2020, 60 percent of businesses that closed due to the pandemic are now permanent closures.
Data does show that the rate of small business closures is slowing. Though, many of those lucky enough to stay open face mounting financial struggles.
Chapter 11 Subchapter V
Of course, there is no blanket solution for each business. But, there are a few options small business owners can take when they feel they are at a dead end financially.
Chapter 11 Subchapter V bankruptcy may be the best option for small businesses struggling in such an uncertain time.
There are various options in the US bankruptcy code, depending on the circumstances. For small business bankruptcies, the newly-created Subchapter V poses unique benefits. This can make financial recovery much more achievable.
As with any major financial decision, it’s important to carefully weigh the pros and cons. But, doing this without the help of a professional can prove difficult to navigate.
For plain-text details on what it really means to declare Chapter 11 Subchapter V bankruptcy, keep reading.
Chapter 11 of the US bankruptcy code focuses on “reorganizing” a business. This allows it to stay alive while restructuring debt and making a plan to repay creditors over time.
Debtors who traditionally file under Chapter 11 are corporations that are not claiming they will never be able to repay their debts. Rather, they are seeking more time to restructure payments to be more manageable in the long-term.
Chapter 11 bankruptcy can be beneficial to some companies in providing a “fresh start” of sorts
But, the procedure for an ordinary Chapter 11 filing can also grow complicated and time-consuming.
It is the most complex—and also the most expensive—form of bankruptcy filing. With this in mind, companies must carefully consider their options. They must explore alternative options before filing under Chapter 11.
This was no longer workable in a large scope, with so many businesses struggling that were performing well pre-pandemic. Enter: Chapter 11 Subchapter V.
Chapter 11 Subchapter V was introduced by the passing of the Small Business Reorganization Act of 2019. The SBRA was signed into law in August 2019 and took effect in February 2020.
This new chapter was designed to aid those small businesses in severe financial distress, particularly given the COVID-19 pandemic. It streamlines some complexities and minimizes costs that make small business bankruptcies more difficult.
To be eligible for this option, a debtor must meet the following criteria:
When submitting the bankruptcy petition, the debtor must include various supporting documents. These include a balance sheet, statement of operations, cash flow statements, and federal tax returns.
The CARES Act further expanded the eligibility for businesses to qualify under this bankruptcy path.
This legislation increases the eligibility pool to also include companies with up to $7,500,000 in debt (both secured and unsecured) to reorganize under Subchapter V. This is a significant increase from the otherwise limit of $2,725,625.
This way, larger companies can reap the benefits that are usually reserved for small businesses with this measure.
Upon filing for Chapter 11 Subchapter V bankruptcy, the court will appoint a trustee. This is different than a traditional Chapter 11 case, as the trustee does not take possession of the debtor’s assets.
Instead, this trustee acts as an advisor of sorts.
They will work with the debtor to develop a reorganization plan. This trustee will also appear at major case hearings. It is their job to ensure the debtor continues to make payments according to the terms of the agreement.
The debtor does financially compensate the Subchapter V trustee for their services. This process can be significantly faster than the traditional Chapter 11 procedures. As such, it aids small businesses that are on the brink of total financial ruin.
The debtor must file its reorganization plan within 90 days of the original Subchapter V bankruptcy filing.
Under traditional Chapter 11 filing, the debtor would have to file a disclosure statement. This document serves to provide creditors with enough information to analyze and decide to vote for or against the plan.
This can delay and further complicate the process, making it more difficult for struggling small businesses to get relief. This is not required under Subchapter V.
Instead, debtors must include a short history of business operations and a liquidation analysis. They must also provide projections to prove the debtor’s ability to meet the repayment terms.
The process for filing Chapter 11 Subchapter V is much less complicated and expensive than regular Chapter 11 procedures. Subchapter V also makes it easier for debtors to keep their equity and control in the company.
Like other Chapter 11 plans, this path paves the way for staying in business while restructuring debt payment plans. But, Subchapter V makes the process much easier.
Declaring Chapter 11 Subchapter V bankruptcy—or any form of bankruptcy, for that matter—is a serious move that can carry major consequences down the line. But, it can also provide needed relief in the right situations.
The best bet is to contact a trusted debt attorney to determine the best course of action for your specific situation. They can help you weigh your options, and decide the most beneficial path that allows your small business to move forward.
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Client personally guaranteed SBA 7(a) loan balance of over $150,000. Business failed and eventually shut down. SBA then pursued client for the balance. We intervened and was able to present an SBA OIC that was accepted for $30,000.
Client personally guaranteed SBA 7(a) loan for $350,000. The small business failed but because of the personal guarantee liability, the client continued to pay the monthly principal & interest out-of-pocket draining his savings. Client hired a local attorney but quickly realized that he was not familiar with SBA-backed loans or their standard operating procedures. Our firm was subsequently hired after the client received the SBA's official 60-day notice. After back-and-forth negotiations, we were able to convince the SBA to reinstate the loan, retract the acceleration of the outstanding balance, modify the original terms, and approve a structured workout reducing the interest rate from 7.75% to 0% and extending the maturity date for a longer period to make the monthly payments affordable. In conclusion, not only we were able to help the client avoid litigation and bankruptcy, but we also save him approximately $227,945 over the term of the workout.
Clients personally guaranteed an SBA 7(a) loan. The SBA referred the debt to the Department of Treasury, which was seeking payment of $487,981 from our clients. We initially filed a Cross-Servicing Dispute, which was denied. As a result, we filed an Appeals Petition with the SBA Office of Hearings and Appeals asserting legal defenses and supporting evidence uncovered during the discovery and investigation phase of our services. Ultimately, the SBA settled the debt for $25,000 - saving our clients approximately $462,981.
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