Subchapter V Simplifies Small Business Bankruptcy

Subchapter V Simplifies Small Business Bankruptcy

Bankruptcy filings, personal and business, fell in 2021 but many financial experts believe 2022 is poised to see a jump.

According to the American Bankruptcy Institute (ABI), 2021 had 24% fewer bankruptcy filings than 2020. The last time the number of bankruptcies was this at this level was 1984.

“The decrease in filings in 2021 is a reflection of the government relief programs, moratoriums, lender deferments, and low interest rates intended to help families and businesses weather the economic challenges resulting from the COVID-19 pandemic,” said ABI Executive Director Amy Quackenboss. “Consumers and businesses are now facing the new year with less government relief, fewer lender deferments, rising inflation, worker shortages, and supply chain challenges as the pandemic continues.”

Smaller companies will be more at risk than larger, public companies, due to their limited access to capital markets. Fortunately, recent changes to the U.S. Bankruptcy Code help small businesses who hope to keep their doors open: Chapter 11 Subchapter V. Small businesses that are earning a profit, but having trouble paying their obligations, may qualify.

What Is Chapter 11 Subchapter V?

Prior to 2020, any business that wanted to restructure its debt to stay open had to do so through Chapter 11. The only exception was a sole proprietorship, which could use Chapter 13.

Congress recognized that the complex and costly steps involved in Chapter 11 were better suited for large corporations, not small businesses.

To rectify this, Congress passed the Small Business Restructuring Act of 2019, also known as Subchapter V under Chapter 11. It is less costly, faster, and more advantageous for small businesses than a standard corporate Chapter 11 bankruptcy.

Businesses with total contingent liquidated secured and unsecured debts of $2,725,625 or less are currently eligible under Subchapter V. At least 50% of the business debt must come from business activities.

With the impact of COVID-19, Congress wanted to expand the number of businesses that could use Subchapter 5 to restructure their debt. The debt limit was temporarily increased to $7.5 million under the CARES Act. The COVID-19 Bankruptcy Relief Extension Act extends that increase until March 27, 2022.

Advantages of Chapter 11 Subchapter V over standard Chapter 11 include the following:

  • Accelerated timelines and restructuring plan confirmations
  • Only the debtor can file a repayment plan with the court
  • The plan doesn’t require creditors’ approval
  • A creditor’s committee is not appointed unless there is cause
  • A trustee is appointed to oversee the reorganization

After filing for bankruptcy, your creditors can’t attempt to collect on the debt. All collections are stopped while you work with the trustee to restructure the debt and create a payment program.

Liquidating a Small Business

For those business owners who want to close, not reorganize, Chapter 7 remains a viable option. The bankruptcy estate includes personal and business property. Chapter 7 does exempt some assets (some equity in a home, retirement accounts, some equipment needed for your profession, and some personal goods). The non-exempt assets are sold by the Chapter 7 bankruptcy trustee to pay off as much of the outstanding debt as possible.

Understanding Your Business Bankruptcy Options

If your small business struggles to pay creditors, talk to one of our knowledgeable lawyers at Scaringi Law Firm. We have a thorough understanding of bankruptcy laws and debt collection practices. We can identify the advantages and disadvantages of each bankruptcy chapter as they related to your specific situation.

Explore your bankruptcy options in a free consultation. Call us today at (717) 775-7195 or use our convenient online form.


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