Subchapter V of Chapter 11 Bankruptcy

Working the Small Business Reorganization Act (SBRA) to Your Advantage

Large businesses and corporations with staggering amounts of debt often use Chapter 11 bankruptcy to obtain a new financial beginning without closing their business. Like Chapter 13, Chapter 11 is a form of debt reorganization. Although this process is theoretically straightforward, small businesses have not seen the same success as their corporate counterparts.

Instead, many have been forced into Chapter 7 bankruptcy because Chapter 11 was too expensive, complex, and time-consuming. Creditors had substantial decision-making authority and would not approve a plan the business owner could afford. Furthermore, the Absolute Priority Rule required debtors to repay unsecured creditors in full if they wished to retain their assets.

Get Help Under the SBRA - Contact Our Informed Attorneys Today

In February of 2020, however, the Small Business Reorganization Act (SBRA) took effect. The SBRA adds Subchapter V to Chapter 11 bankruptcy, giving small business owners exclusive access to a streamlined, cost-effective solution to their debt. At Fear Waddell, P.C., we are thoroughly prepared to help you take full advantage of this new version of bankruptcy.

To learn more about Subchapter V of Chapter 11 bankruptcy, contact our firm online or give our office a call at (559) 418-3022 today.

How Did the SBRA Change Chapter 11?

With Subchapter V, qualifying small business entities and individuals/sole proprietors may begin to reap substantial benefits from Chapter 11 bankruptcy. Here is a brief overview of the differences between Chapter 11 for small business owners before and after the SBRA.

• Elimination of the Absolute Priority Rule. Under Subchapter V, small business owners will not need to fully repay their unsecured creditors to keep their assets.
• No need for approval from creditors. Previously, creditors would vote to accept a debtor’s repayment plan, but this is no longer necessary under Subchapter V.
• No creditors’ committee or disclosure statements. The funds and professional fees associated with creditors’ committees and disclosure statements significantly raised the cost of Chapter 11 for small business owners. Under Subchapter V, neither are necessary.
• Potential to modify a mortgage. Small business owners who take out a mortgage from their residence specifically to finance their business may be able to treat the second mortgage like other unsecured debt (i.e. reorganizing it into a payment plan and potentially discharging it).
• A new ally in the Chapter 11 trustee. Before the SBRA, Chapter 11 trustees were highly motivated to sell the debtor’s expensive assets because they were paid a portion of the compensation given to creditors. Now, trustees receive compensation based on the debtor’s monthly payments, and they can no longer sell high-value assets. The trustee’s goal, therefore, is the same as the debtors, which is to get approval from creditors.

Overall, Subchapter V can be a powerful form of debt-relief for small business owners who previously could not successfully file Chapter 11 bankruptcy.

Who Can File Under Subchapter V?

To qualify for Chapter 11 bankruptcy under Subchapter V, you can be an individual or a small business entity. You must not owe more than $2,725,625, and at least 50% of your debt must have arisen through commercial or business activities.

After successfully filing under Subchapter V, you will use all disposable income to repay creditors in 3-5 years. Once you finish this payment plan, you can be released from liability for any remaining unsecured debt.

Contact Fear Waddell, P.C. to See if Subchapter V Is Right for You

Small businesses are the backbone of the American economy. If multi-million-dollar corporations can use bankruptcy to free themselves of debt, you should have this option as well. At Fear Waddell, P.C., we have handled more than a thousand bankruptcy cases, and we look forward to putting our skills and experience to work for your future.

Subchapter V of Chapter 11 bankruptcy may free you from the burden of debt without forcing you out of business. Call (559) 418-3022 or contact us online to see if this option is right for you.