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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 CallSince 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.
Millions of Dollars in SBA Debts Resolved via Offer in Compromise and Negotiated Repayment Agreements without our Clients filing for Bankruptcy or Facing Home Foreclosure
Millions of Dollars in Treasury Debts Defended Against via AWG Hearings, Treasury Offset Program Resolution, Cross-servicing Disputes, Private Collection Agency Representation, Compromise Offers and Negotiated Repayment Agreements
Our Attorneys are Authorized by the Agency Practice Act to Represent Federal Debtors Nationwide before the SBA, The SBA Office of Hearings and Appeals, the Treasury Department, and the Bureau of Fiscal Service.
Clients personally guaranteed SBA 7(a) loan balance of over $300,000. Clients also pledged their homes as additional collateral. SBA OIC accepted $87,000 with the full lien release against the home.
Client’s small business obtained an SBA 7(a) loan for $150,000. He and his wife signed personal guarantees and pledged their home as collateral. The SBA loan went into default, the term or maturity date was accelerated and demand for payment of the entire amount claimed was made. The SBA lender’s note gave it the right to adjust the default interest rate from 7.25% to 18% per annum. The business filed for Chapter 11 bankruptcy but was dismissed after 3 years due to its inability to continue with payments under the plan. Clients wanted to file for Chapter 7 bankruptcy, which would have been a mistake as their home had significant equity to repay the SBA loan balance in full as the Trustee would likely seize and sell the home to repay the secured and unsecured creditors. However, the SBA lender opted to pursue the SBA 7(a) Guaranty and subsequently assigned the loan and the right to enforce collection to the SBA. Clients then received the SBA Official 60-Day Notice and hired the Firm to respond to it and negotiate on their behalf. Clients disputed the SBA’s alleged balance of $148,000, as several payments made to the SBA lender during the Chapter 11 reorganization were not accounted for. To challenge the SBA’s claimed debt balance, the Firm Attorneys initiated expedited discovery to obtain government records. SBA records disclosed the true amount owed was about $97,000. Moreover, because the Clients’ home had significant equity, they were not eligible for an Offer in Compromise or an immediate Release of Lien for Consideration, despite being incorrectly advised by non-attorney consulting companies that they were. Instead, our Firm Attorneys recommended a Workout of $97,000 spread over a lengthy term and a waiver of the applicable interest rate making the monthly payment affordable. After back and forth negotiations, SBA approved the Workout proposal, thereby saving the home from imminent foreclosure and reducing the Clients' liability by nearly $81,000 in incorrect principal balance, accrued interest, and statutory collection fees.
Client personally guaranteed SBA 7(a) loan for $150,000. COVID-19 caused the business to fail, and the loan went into default with a balance of $133,000. Client initially hired a non-attorney consultant to negotiate an OIC. The SBA summarily rejected the ineligible OIC and the debt was referred to Treasury’sBureau of Fiscal Service for enforced collection in the debt amount of $195,000. We were hired to intervene and initiated discovery for SBA and Fiscal Service records. We were able to recall the case from Fiscal Service back to the SBA. We then negotiated a structured workout with favorable terms that saves the client approximately $198,000 over the agreed-upon workout term by waiving contractual and statutory administrative fees, collection costs, penalties, and interest.
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