Although enacted before the COVID-19 pandemic, the new Subchapter V of Chapter 11 of the Bankruptcy Code seems almost prescient now and could be a game-changer for small businesses looking to restructure. Indeed, the Subchapter V provisions became effective on February 19, 2020, not a moment too soon given that the pandemic gripped the country just weeks later.
In a recent article for the American Bankruptcy Trustee Journal, Mark Hall and I explored the potential benefits of Subchapter V and its extreme timeliness in light of the pandemic.
Prior to Subchapter V, the time and costs of a Chapter 11 reorganization, including fees for professionals (particularly if an unsecured creditors’ committee is formed) and the United States Trustee, were often too prohibitive for many small businesses. Consequently, many small businesses were force to liquidate without bankruptcy restructuring as a viable lifeline.
Some of the more notable features of Subchapter V that has made a Chapter 11 reorganization more feasible for qualifying small businesses (and qualifying individuals who have at least 50% of their debt arising from commercial or business activities), include:
- Reducing administrative costs of Chapter 11 through eliminating the appointment of an unsecured creditors’ committee and exempting requirement to pay United States Trustee fees.
- Implementing streamlined deadlines, including requiring the debtor to file a plan of reorganization within 90 days.
- Appointing a trustee to help facilitate the process and mediate issues with creditors.
- More easily enabling small business owners to retain their ownership interest in the reorganized company.
Additionally, as originally enacted, businesses (and individuals) with non-contingent, liquidated debts of up to $2,725,625 qualified for Subchapter V. However, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) passed by Congress in March in response to the pandemic, nearly tripled the Subchapter V debt limit to $7.5 million for one year. As a result, far more businesses will be able to take advantage of Subchapter V until at least March 2021.