Subchapter V: A Window for Small Business Reorganizations?

Nov 17, 2020Blog

Steve WeissBy Attorney Steven Weiss

Chapter 11 reorganizations can be time consuming and expensive propositions, especially for small to medium sized businesses. All too often, such cases sink under the weight imposed by the delays inherent in obtaining approval of a disclosure statement, and confirming a reorganization plan, payment of quarterly fees to the United States Trustee, and the cumulative legal and other professional fees for the debtor and unsecured creditors’ committee. To make Chapter 11 more accessible to financially distressed small to medium businesses, in 2018 Congress created a new version of Chapter 11, known as a “Subchapter V,” made possible by the Small Business Reorganization Act (SBRA).

Subchapter V makes several changes intended to streamline the small business reorganization process. While a trustee is appointed to oversee the case, a creditors’ committee will not ordinarily be appointed. Instead of filing both a disclosure statement and plan, only a reorganization plan will be required (which must be filed within 90 days after the petition is filed).

A plan can be approved even over the objections of creditors if the debtor pledges its disposable income to the plan for three to five years. No quarterly fees will be payable to the United States Trustee. There are other provisions that will help debtors reorganize their debts. Thus, it is possible to get a company in and out of bankruptcy much more quickly and inexpensively.

When Subchapter V became effective in February of this year, an individual or company seeking Subchapter V relief had to have claims against it of less than $2,725,625. When the CARES Act was enacted on March 27, 2020 to address the COVID pandemic, it increased the eligibility limit to $7,500,000. However, that increase is effective for only one year. As of this date, it is unclear whether Congress will extend this increase.

Companies and individuals of all sorts are facing tremendous financial uncertainty in these times. Those with a debt burden of more than the initial limit, but within the higher limit created by the CARES Act, should be aware that there is a window of opportunity that may be closing at the end of March.