A relatively new amendment to the U.S. Bankruptcy Code provides a means for small business owners whose debts are less than $7,500,000 to reorganize their company in a matter of months. The provisions and process referred to as “Subchapter V” relaxes the procedures and time frame and significantly reduces reorganization costs for small businesses. The process is designed to allow small businesses to reorganize within approximately 90-120 days. Subchapter V permits owners to remain in management and operation of the business to continue ownership and operations after bankruptcy. It affords the Company the opportunity to seek a plan of reorganization, typically with debt discounted and paid over time, if confirmed by the Bankruptcy Court. Subchapter V’s provisions relax several of the key requirements in and obstacles of a standard Chapter 11 case that allows a small business the relief it needs in record time at a significantly reduced cost. Some of the highlights of Subchapter V include:
- The Company remains in possession and operation of its business (unless removed by the Bankruptcy Court for cause). A Subchapter V trustee is appointed in each case to assist with the goal of obtaining a confirmed plan of reorganization.
- Unless the Bankruptcy Court orders otherwise, there is no creditors’ committee formed.
- Within 60 days of filing, the Court will hold a status conference “to further the expeditious and economical resolution” of the case.
- The Debtor must file its plan of reorganization within 90 days after filing the case. This deadline can be extended under “circumstances for which the debtor should not justly be held accountable.”
- Confirmation of a plan does not require the acceptance by an impaired class of creditors (creditors whose claims are adjusted) as a condition of confirmation (as in a Chapter 11 reorganization).
- Payment of debts, including administrative claims, can extend over 3 to 5 years.
- The “absolute priority rule” is not in effect. The absolute priority rule in a Chapter 11 reorganization prevents business owners from retaining their interests in the Company unless unsecured creditors are paid in full or consent. This rule is not applicable in a Subchapter V case so that business owner can emerge as the Company’s owner.
Other provisions of Chapter 11 remain available to a Subchapter V debtor, including rejection of burdensome executory contracts and unexpired leases and the ability to submit and seek confirmation of a plan permitting payments to creditors of reduced amounts, under appropriate circumstances. The result sought is a reorganization in which the small business owners retain ownership, with debts restructured for payment over time. Additionally, the automatic stay prohibits creditors from initiating or continuing litigation or collection activities against the Company unless such creditors obtain permission of the Bankruptcy Court to do so.
The shortened timeline requires that businesses be well prepared at time of filing, and have a concept of the plan and supporting data assembled and a Plan of Reorganization in mind prior to filing.
This brief summary of Subchapter V is not intended to be a comprehensive guide nor does it contain or convey legal advice. This information should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. If you would like to discuss your particular small business or to further explore Subchapter V, please contact us.