Subchapter V Bankruptcy in Pennsylvania
Subchapter V Bankruptcy in Pennsylvania
Bankruptcy that Keeps Businesses Open by Restructuring Debt
Before February 19, 2020, most small businesses in financial trouble had two bankruptcy options. They could either liquidate and close their doors in a Chapter 7 bankruptcy, or they could embark on the complex and time-consuming process of a Chapter 11 bankruptcy reorganization better suited for larger companies.
Subchapter V was added to the Chapter 11 bankruptcy code as part of the Small Business Reorganization Act of 2019 to offer small businesses a third option. There were more than 1,500 Subchapter V filings in the U.S. between February 2020 and February 2021.
Subchapter V streamlines Chapter 11 bankruptcy so that a business can restructure its debt and continue to offer its goods and/or services.
Qualifying for Subchapter V
A business must meet certain criteria to qualify to file for a Subchapter V bankruptcy. Single asset real estate debtors are not eligible.
Subchapter V eligibility requirements include the following:
- The debtor must be engaged in commercial or business activities.
- The secured and unsecured debt included in the restructuring cannot exceed $7.5 million. This debt limit is effective until June 21, 2024. The original debt ceiling was just over $2.7 million and was temporarily expanded as part of the response to COVID-19.
- At least 50% of the debt must be from the debtor’s business activities.
Paycheck Protection Program (PPP) loans do not count toward the debt limit.
Advantages Over Traditional Chapter 11
A business owner has significantly more control over how the business is reorganized. The debtor proposes a plan that outlines how creditors will be repaid. Creditors cannot attempt to collect on the debt after filing for bankruptcy. All collections are stopped while the debtor works with the trustee to restructure the debt and create a payment program.
Additional Subchapter V benefits include the following:
- Disclosure statements are not required.
- The debtor can continue to own and manage the business.
- Only the debtor can file a restructuring plan. The plan is generally due within 90 days after the bankruptcy filing. Creditors cannot force a plan on the business.
- The debtor can amortize the cost of filing for bankruptcy.
- A creditors’ committee to represent the interest of unsecured creditors is typically not created.
- Subchapter V debtors do not have to pay quarterly trustee fees.
- A Subchapter V debtor may continue to manage their affairs under the oversight of a trustee.
(Unlike other business entities, a sole proprietor can use Chapter 13 bankruptcy to reorganize debt and stay in business.)
Repayment Plan Under Subchapter V
An advantage of Subchapter V is the ability of a business to create a repayment plan that will satisfy debt over a three-to-five-year period. The plan must be approved by the bankruptcy trustee but does not need the endorsement of the creditors. Repayment must be fair and equitable. All projected disposable income of the debtor is paid into the plan over the length of the plan.
Harrisburg Attorneys for Small Business Subchapter V Bankruptcy
Small businesses create two-thirds of new jobs in the U.S. and account for 44% of U.S. economic activity. Subchapter V allows small businesses to maintain operations and keep employees on the payroll. Debt reorganization helps a business strengthen its bottom line and provide its goods and services for years to come.
Small businesses do more than drive Pennsylvania’s economic engine. Owners and employees are integral parts of the community. They sponsor athletic teams, fund scholarships, and volunteer for worthwhile organizations. The health of small businesses directly impacts other aspects of cities and towns across the state.
At Scaringi Law, we want to help businesses rise above the shadow of debt. Contact us to learn more about your business bankruptcy optionssuch as Subchapter V. Schedule your consultation by calling (717) 775-7195.