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New Subchapter 5 of the U.S. Bankruptcy Code

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Effective February 19, 2020, the Bankruptcy Code will provide for a somewhat more compact and hopefully, easier version of Chapter 11 Reorganizations for Small Business Corporate and Individual Debtors. It is commonly referred to as a “Subchapter 5.”

The purpose of this new section of the Bankruptcy Code is to allow business debtors and certain individuals with debts below $ 2.75 Million to reorganize their obligations under Chapter 11 without the need for obtaining the consent of a class of “impaired” creditors as required under basic Chapter 11. It also relaxes some of the rules for administration of the Chapter 11 plan and the payment of United States Trustee quarterly fees. Certain individual debtors may also benefit from the elimination of the so-called “absolute priority rule” which prevented exemption of real or personal property in some cases.

There are still some large unknowns, most notably the amount of compensation which will be sought by the administering trustee, or for the Trustee’s retention of professionals to assist with the case. There is the potential that these costs may far outweigh any of the intended benefits of this new provision of the Code. There is also under this section a new “disposable income” requirement which may compel a minimum payment to creditor higher than what is now compelled under Chapter 11. There as well remain some of the traditional Chapter 11 burdens such as monthly operating reports, special Debtor in Possession bank accounts and an intensive inquiry by the appointed Trustee.

It is too early to determine whether this section will actually produce the intended result of an easier, truncated and more affordable Chapter 11 filing- yet it may still offer a valuable remedy for small business debtors and individuals leery of a full-blown Chapter 11 filing.

Stay tuned.