For so many, the American Dream means starting your own business—one that ultimately thrives and becomes a shining part of your legacy. After all, what could be more American than the autonomy experienced from owning your business, including the freedom to work as you must for your vision to succeed?
But what does the American business owner do when that dream is threatened by clients who stop paying, work orders coming in less frequently—or a pandemic that promptly shuts everything down?
There’s good news! A recent addition to the United States Bankruptcy Code offers a new streamlined process for small business owners who need relief during such times. The new process more easily allows business operations to continue and business owners to retain ownership of their businesses. You don’t have to give up your dream!
A new law called the Small Business Reorganization Act (SBRA) became effective in February 2020, just prior to the COVID-19 pandemic.1 The SBRA added new Subchapter V to Chapter 11 of the United States Bankruptcy Code, the purpose of which is to make the restructuring process faster, easier, and more affordable for struggling small businesses. Shortly after enactment, the Coronavirus Aid, Relief and Economic Security Act (CARES Act)2 temporarily amplifies the reach of new Subchapter V’s relief measures by increasing the debt threshold to $7,500,000 so that many more small businesses qualify for such relief. Again, this increase is only available for one year—in March of 2021, the threshold is set to revert to $2,725,625.
Have questions about bankruptcy relief?
Contact our legal team and we will find solutions for your situation.
Within the Subchapter V provisions that create the new process are the following benefits for small businesses only:
- Expedited Process. Compared to the traditional Chapter 11 reorganization, the timeline involved with a Subchapter V reorganization is significantly shortened. Within 60 days of the petition date, a status conference must be conducted, and the business must file a plan within 90 days of the petition date.
- Efficiency. Chapter 11 cases have earned a reputation for being complex—particularly since the other parties may propose competing plans. Subchapter V simplifies things by ensuring that only the business may propose a reorganization plan. Additionally, there is no requirement for the business to have a costly disclosure statement separately prepared.
- Court Appointed Creditors Committee. Unlike a Chapter 11 case, a tedious Creditors Committee may only be appointed by a court than finds “cause” for such appointment.
- Trustee as Facilitator. Rather than taking over business operations, the appointed Trustee in a Subchapter V case is intended to guide the business through the process. This also means that the business will no longer have to pay a monthly “professional” fee to the Trustee.
Administrative Expenses Due Later. In a traditional Chapter 11 case, many administrative expenses incurred after the bankruptcy case begins must be paid on the plan’s effective date. Subchapter V businesses are able to pay such claims over the plan’s entire term. Significantly, the traditional due date was a primary cause of many small businesses’ Chapter 11 reorganization failures.
Note that under the SBRA, the treatment regarding priorities of debts such as taxes, loans, and other forms of secured debt has not changed much. The treatment of unsecured debt, however, changed significantly since the small business can retain their business if they promise to use future profits to pay a portion of that debt through monthly payments. Also, consider that Subchapter V provides that if the business owner used his or her primary residence as security for a loan in order to fund the business, then the plan may modify that loan.
So, if your business is struggling, remember that Subchapter V is a powerful tool which can help you keep your dream alive. The process was created specifically for small businesses with limited financial resources, and, as such, it was designed to expedite reorganization and reduce the costs typically involved. We urge you to consult with an experienced bankruptcy attorney to see if Subchapter V is the right process for you!
If you have questions or concerns about bankruptcy, contact us at (410) 497-5947 or fill out our online form.
- Pub. L. 116-54.
- Pub. L. 116-136.