BENEFITS OF SUBCHAPTER-V FILING FOR SMALL BUSINESSES SEEKING REORGANIZATION
BENEFITS OF SUBCHAPTER-V FILING FOR SMALL BUSINESSES SEEKING REORGANIZATION
Samantha M. Alecozay
Bankruptcy Associate, Heidi McLeod Law Office, PLLC
April 23, 2021
As a small business operating pre-2020, it was difficult to consider getting a second chance to run your business under chapter 11 bankruptcy instead of closing up shop for good. Chapter 11 reorganization is a viable option for large corporations, but the legal requirements and financial burdens can be too much for small businesses to handle. Now, with the introduction of Subchapter-V filing, reorganization is possible for smaller businesses wanting a fresh start.
What is Subchapter-V?
Signed in 2019 and effective February 19, 2020, the Small Business Reorganization Act (SBRA) introduced Subchapter V (Sub-V) as an election under chapter 11, codified in the Bankruptcy Code (Code) and related statutes.
According to Congress, the purpose of the SBRA is “to streamline the process by which small business debtors reorganize and rehabilitate their financial affairs.”[1] Essentially, Sub-V is a modified version of chapter 11 using concepts from consumer bankruptcy to create a quick and affordable system for smaller entities to seek reorganization.
Why This Matters
The traditional rules of chapter 11 make reorganization harder for small businesses compared to large corporations based on creditor interests, legal requirements, and financial burdens. Moreover, since October 2007, an estimated 40% of Debtors filing for chapter 11 qualify as small businesses, making Sub-V relevant and useful.[2]
Who May Qualify?
Answer:
- BEFORE March 2022: A small business with less than $7.5M in aggregate debt.
- AFTER March 2022: A small business with less than $2.7M in aggregate debt.
(Note: single asset real estate cases cannot file Sub-V)
Anyone who qualifies as a “small business” according to amended definitions in the Code may file using Sub-V election. The SBRA added section 1182 to define “debtor” as a “small business debtor,” and small business debtor is described in amended section 101(51D) of the Code as “a person engaged in commercial or business activities…that has aggregate noncontingent liquidated secured and unsecured debts…in an amount not more than $2,725,625 (excluding debts owed to 1 or more affiliates or insiders).”
Due to pandemic conditions, there is also a temporary amendment to the Code under the CARES Act, increasing the debt limit to $7.5 million. This amendment will last until the end of March 2022, making it even easier to qualify as a small business under the Code.
Basic Sub-V Timeline
The Sub-V timeline is a fast paced, reduced cost, teamwork approach to reorganization that takes around 3 to 6 months to potentially reach confirmation.[3] Compared to traditional chapter 11, which can take anywhere from 6 months to even years to reach confirmation (along with significant fees), Sub-V provides an affordable and fast option. Below is a general outline of the Sub-V timeline:
- Petition Date: The Debtor must indicate whether it is a small business debtor, and if so, whether it elects to have Sub-V apply.[4]
- Appointment of a Sub-V Trustee: The U.S. Trustee will appoint a Sub-V Trustee for all Sub-V cases or serve as Trustee.[5]
- Initial Debtor Interview (IDI): Standard to both traditional chapter 11 cases and Sub-V, the Debtor must complete an Initial Report and attend an IDI meeting with the U.S. Trustee and Sub-V Trustee to discuss the Debtor’s circumstances and potential plan of reorganization.
- § 341 Creditor Meeting: The Debtor must meet with the U.S. Trustee, Sub-V Trustee, and creditors to address creditor questions as well as any Trustee concerns.
- Status Conference: No later than 60 days after the petition date, the court will hold a Status Conference “to further the expeditious and economical resolution of a case under this subchapter.”[6] The Sub-V Trustee will appear as well.
- 14 days BEFORE the Status Conference, the Debtor must file and serve on all parties in interest “a report that details the efforts the Debtor has undertaken and will undertake to attain a consensual plan of reorganization.”[7]
- Filing Plan of Reorganization: No later than 90 days after the petition date, the Debtor must file a plan. The court may extend the deadline (and other deadlines) if the need for an extension is found to be essentially not the Debtor’s fault.[8]
- Confirmation Hearing: A hearing will occur to consider confirmation of the proposed plan.[9]
- Discharge: If a plan is confirmed, it will either be consensually confirmed or non-consensually confirmed depending on the facts of the case. Regardless of the type of confirmation, both will allow the Debtor to make payments under the plan and be discharged at a certain date. Each type will also have its own rules for the Debtor to follow so that the Debtor can be discharged of debts.[10]
Please note that the Sub-V timeline may vary on a case-by-case basis.
Major Differences Between Traditional Chapter 11 and Sub-V
Sub-V Trustee
Traditional Chapter 11: The Debtor must operate on its own to coordinate and file a potentially confirmable plan.
- Sub-V: Management of the Debtor’s affairs remains with the Debtor, but a Sub-V Trustee will be appointed for all Sub-V cases. The role of the Sub-V Trustee is to: oversee and monitor the case, appear and be heard on specified matters, facilitate a consensual plan, and other duties meant to assist the Sub-V process.[11] Depending on who is appointed as the Sub-V Trustee, his or her oversight can help the Debtor to create a confirmable plan.
Status Conference
Traditional Chapter 11: The Debtor is not required to have a Status Conference, so issues that arise after the IDI or 341 creditor meeting may fail to be addressed before the hearing, possibly delaying or preventing confirmation.
- Sub-V: Under § 1188(a), a Status Conference is required and must be held no later than 60 days from the date of petition. Having a Status Conference prior to confirmation gives an opportunity for the Debtor to address potential issues and objections to the plan before the confirmation hearing.
Removal of Disclosure Statement
Traditional Chapter 11: The Code requires that creditors receive “adequate information” about the Debtor and the plan in the form of a written Disclosure Statement that the court approves. This process requires an extensive amount of time and diligence to complete.[12]
- Sub-V: The Debtor is not required to create a Disclosure Statement. Instead, the Code provides for a small summary about the Debtor to be provided in the plan along with other financial information, thereby reducing time and money the Debtor has to spend.[13]
Only the Debtor Can Propose a Plan
Traditional Chapter 11: Generally, for the first 120 days from the date of petition, only the Debtor can file a plan. After that, creditors in the bankruptcy case may propose a plan.[14]
- Sub-V: Only the Debtor may propose a plan in Sub-V cases, and the timeline is shortened to reduce costs. This prevents creditor interference.
Elimination of Unsecured Creditor Committee
Traditional Chapter 11: An unsecured creditor committee can be created to represent unsecured creditor interests, and the committee usually hires an attorney to represent them. The attorney is also paid from the Debtor’s estate.[15]
- Sub-V: An unsecured creditor committee is NOT appointed unless the court orders otherwise. This reduces costs as well as stress, as often the relationship between the Debtor and unsecured creditor committee is hostile.
Reduced Confirmation Requirements
Traditional Chapter 11: The court will confirm a chapter 11 plan if all the requirements of § 1129(a) are met, or if all requirements except § 1129(a)(8) are met. Section 1129 outlines a long list of requirements for a plan to be confirmable, such as not allowing the owner of the Debtor to retain control of the business if certain creditors do not receive the full amount of their claims (the “absolute priority rule”) and requiring that at least one class of impaired creditors accept the plan. These requirements put a heavy burden on the Debtor, as often creditors are not interested in running the Debtor’s business unless it is a large corporation. Moreover, impaired creditors frequently reject plans even if the plan is reasonable. Both of these rules make confirmation harder to achieve.
- Sub-V: Section 1191 applies to confirmation requirements inSub-V cases instead of the entirety of § 1129. Section 1191 removed the absolute priority rule and requirement that at least one impaired class of creditors accept the plan. Therefore, the Debtor can still run its business without objection and the plan can still be confirmed even if no creditor accepts the plan (so long as the plan does not unfairly discriminate and is fair and equitable to creditors). This prevents creditors from creating unnecessary obstacles for the Debtor.
Projected Disposable Income
Traditional Chapter 11: The payment amounts to creditors under the plan are negotiated amounts decided through extensive communications with creditors pre-plan filing.
- Sub-V: The Debtor need only pay its projected disposable income towards the plan. Disposable income, a term-of-art from consumer bankruptcy, is the money that is left after payments are made to employees, utilities, and other expenses necessary to operate the business. This approach reduces the expectation of creditors and what they are entitled to receive under the plan.
Conclusion
Sub-V bankruptcy is a solution to the problem of small businesses not being able to consider reorganization. With its reduced costs, reduced requirements, and fast paced system, it is a viable alternative to traditional Chapter 11 filing. If you wish to consider whether reorganization is right for your business, contact us during business hours for a free consultation!
Heidi McLeod Law Office, PLLC
Cherry Ridge, Ste. 214
San Antonio, Texas 78230
Office: (210) 853-0092
Fax: (210) 853-0129
Office Hours:
Monday – Friday
9:00 a.m. – 5:00 p.m.
[1] H.R. Rep. No. 116-171, at 1 (2019).
[2] Brubaker at 5-6.
[3] Confirmation cannot be guaranteed for all cases and is determined on a case-by-case basis.
[4] Rule 1020(a).
[5] § 1183(a).
[7] § 1188(c).
[8] § 1189(b).
[9] Rule 2002(b).
[10] § 1191.
[11] § 1183(b).
[12] § 1125.
[13] § 1181(a)(1).
[14] § 1121.
[15] § 1102(a)(3).
