Subchapter V Bankruptcy: a lifeline for small businesses

In 2019, Congress passed the Small Business Reorganization Act, known as Subchapter V, in Chapter 11 of Title 11 of the United States Code. Subchapter V filing offers a faster and less costly reorganization process for lower and middle market businesses that typically fail under traditional Chapter 11.

Are you a candidate? The best candidates for subchapter V are debtors with problems that can be resolved through the bankruptcy process, including reduction/restructuring of debt payments, tenancy issues, and/or other issues that, when modified, allow the debtor to earn a profit (disposable income) . Debtors are generally persons or entities engaged in combusiness or commercial activities, with less than $7.5 million (including accounts payable) in debt. At least 50% of the debt must come from business or commercial activities.

If the debtor is unable to reliably generate income and cash flow, the chances of success decrease significantly, as creditors are entitled to recover more than a Chapter 7 liquidation.

When to ask for help: With proper planning and execution, Subchapter V can be a lifesaver for small businesses. Unfortunately, many companies ask for help when they have thhave exhausted their capital reserves and likely provided significant personal assets, secured high-risk loans, and/or failed to pay taxes to make ends meet. Don’t wait for this to happen to ask for help.

Preparing to file: Make sure your books and recrds are up to date, including tax returns. The petition requires a significant amount of information based on company records.

The Subchapter V bankruptcy timeline is fast. Your reorganization plan must be submitted within 90 days of filingeng. The plan should include a brief history, liquidation analysis and projections. The general elements of sub-chapter V include:

The subchapter V trustee (limited role) is appointed in place of a creditors’ committee.

The debtor must voluntarily choose Subchfitter V and controls the process. The debtor is the only one who can propose a recovery plan, which can be confirmed without any creditor voting to accept it.

Declarations are not required to solicit votes from creditors.

Connectionstriggering/mortgage modification – as long as the proceeds of the mortgage were used for the debtor’s business and not for the purchase of the residence, the debtor can modify a mortgage on the principal residence.

Although the U.S. Administrator sets and presides on the debtor’s initial interview and 341 meetings, there are no trustee fees in the United States.

The debtor can now retain the services of a pre-bankruptcy professional (lawyer or accountant) who has a claim before the petition of less than $10,000.

Debtors can obtain a discharge on completion of plan payments and retain dividends without investing additional funds.

About the Author: Charles N. persingCPA/CFF, CFE, CIRA, CVA, is a partner of Bederson LLP and is a Sub-Chapter V Administrator in the Eastern and Southern Districtss of New York. As a member of the firm’s insolvency and litigation team, persing serves as financial advisor to Chapter 7 Administrators in the Mid-Atlantic region. His practice includes reorganization, business valuation, turnaround advice, litigationmanagement services, management of commercial disputes, etc. He can be reached at [email protected].

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