In February 2020, a new subchapter of Chapter 11 of the Bankruptcy Code took effect relaxing the procedures and time frame and substantially reducing reorganization costs for small businesses. This Subchapter V allows small businesses with liabilities less than $2,725,625 (as a result of the COVID-19 pandemic, this debt limit has been increased to $7,500,000 until March 27, 2021) to access a more efficient and cost-effective path to reorganization. The process is designed to allow small businesses to reorganize within approximately 90 days, emerge from bankruptcy, and continue operations outside of bankruptcy. Subchapter V’s provisions relax several of the key requirements in a standard Chapter 11 case that may allow your business the relief it needs in record time at a significantly reduced cost. Some of the highlights of Subchapter V include:

  • Unless the court orders otherwise, there is no creditors’ committee. A Subchapter V trustee is appointed in each case to assist with the goal of obtaining a confirmed plan of reorganization, but the debtor remains in possession and operation of its business.
  • 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 a plan within 90 days after filing. This deadline can only 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
  • 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 blocks equity holders from retaining their interests in the company unless unsecured creditors are paid in full. This rule is not applicable in a Subchapter V case

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 which permits payments to creditors of reduced amounts, under appropriate circumstances. Additionally, the automatic stay prohibits creditors from initiating or continuing litigation or collection activities unless such creditors obtain permission of the Bankruptcy Court.

The foregoing is a brief summary of Subchapter V and is not intended to be a comprehensive guide nor does the foregoing 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 facts or circumstances or to further explore Subchapter V, please contact us.

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