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Is Subchapter 5 a Better Alternative to Traditional Chapter 11 for Small Businesses?

Posted in General Bankruptcy , Chapter 11

Is Subchapter 5 a Better Alternative to Traditional Chapter 11 for Small Businesses?

After fourteen (14) months of enactment, the Subchapter V provisions of Chapter 11 of the Bankruptcy Code has worked remarkably well in terms of simplification and reduction of time and expenses for small business reorganizations. The concern of run-a-way trustee fees has not materialized and plans are being confirmed far quicker and at higher rates than traditional Chapter 11 filings.

Congress first enacted these provisions commonly known as “Subchapter Five” (11U.S.C. § 1181 et. seq.) in August 2019 and they took effect in February 2020. These provisions were created to assist small businesses or individuals with business concerns (defined as debts below $ 2,725,625, which has been expanded to $ 7,500,000 through 3/27/22 as part of Covid 19 Relief). It contains numerous beneficial provisions in terms of time (the plan must be filed within 90 days), simplification, and expense but also permit plans to be confirmed without the necessity of obtaining the approval of a class of impaired creditors. It should be noted however that there are significant benefits to the Debtor to obtain the consent of the creditors to a plan, and the Court’s monitoring of the case and the Trustee’s role is designed in part to facilitate obtaining such a consensual plan.

It must be stressed that cases filed under Subchapter V are still Chapter 11 bankruptcies – and many of the onerous obligations of Chapter 11, i.e. a specified Debtor in Possession bank account, expanded reviews by the U.S. Trustee’s office, an extensive meeting of creditors, monthly operating reports to the U.S. Trustee’s office and a Plan that will easily exceed 50 pages are still required. Those who perceive this filing as an extension of Chapter 13 reorganizations (individuals with unsecured debts under $ 419,275 and secured debts under $ 1,257.850) are misinformed.

Yes, it is a simpler Chapter 11 but it remains a significant undertaking for any debtor and will necessitate extensive effort, fees, and costs. Nevertheless, if a small business has the opportunity and ability to reorganize by adjusting the terms of its secured debts and potentially eliminating large amounts of the unsecured debt, these new provisions of the Bankruptcy Code may provide a very attractive tool to accomplish what was previously only available to larger business interests.