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.
Within the Subchapter V provisions that create the new process are the following benefits for small businesses only:
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!