Subchapter V: What Small Businesses Should Know

February 11, 2022 By Matt McKinlay

Author: Jade Millington

When your business is insolvent or illiquid, sometimes the best (or only) alternative is to seek court protection under a bankruptcy filing. Chapter 11 bankruptcy, commonly known as the business reorganization chapter of the Bankruptcy Code, is available to both business entities and individuals that seek to maintain control of their business and assets while working through a reorganization. However, Chapter 11 is typically expensive and takes a long time which may make it infeasible for small businesses. 

In February 2020 Congress enacted the Small Business Reorganization Act of 2019 (“SBRA”), which is now known as a Subchapter V Bankruptcy. The purpose is to help small businesses through a restructuring with the protection of a bankruptcy court and in a faster and less expensive process. The SBRA includes several key features that help small businesses through the reorganization process, including the following: 

  • A business qualifies for a Subchapter V Bankruptcy if the total debts are $7.5 million or less (note that a single asset real estate entity typically does not qualify under the SBRA). This debt limit was increased from $2,725,625 by the CARES Act and will decrease again if the limit is not extended by Congress. 
  • Unlike a regular Chapter 11 bankruptcy where the US Trustee appoints a committee of unsecured creditors, under Subchapter V, a committee is not automatically appointed, only by an order of the court. This appointment will be the exception, not the rule. Overall, this reduces the administrative burden on the small business that comes with the costs of a committee of unsecured creditors, and it shortens the time required to create, receive approval and then execute on a restructuring plan.
  • Under the SBRA, small business debtors are exempt from paying US Trustee fees.
  • Only the small business debtor can file a plan for reorganization. In a regular Chapter 11 filing, any party-in-interest could file a plan once certain timing and criteria are met. This significant difference can greatly reduce time and cost.
  • The process to gain approval of a plan in a typical Chapter 11 can be lengthy, costly, and cumbersome. Under the SBRA the process is simplified to keep the process moving more quickly. The debtor must file a plan within 90 days of filing bankruptcy.
  • The debtor’s plan can be spread over 3-5 years. This allows the debtor time to repay and allows creditors time and a chance to recover a more meaningful amount.
  • In a traditional Chapter 11 bankruptcy, the debtor’s plan must follow the “absolute priority rule” in distributing funds to creditors.  The absolute priority rule states that senior creditors are paid first and in full before the next class of creditors receives its first penny.  In a Subchapter V, the absolute priority rule is eliminated.  This means a confirmed plan may allow for some creditors to not be paid in full and still qualify for reorganization, and that owners may maintain their equity in the business.

While bankruptcy is rarely something business owners hope to pursue, the Subchapter V Bankruptcy can be an effective way to reorganize. While this filing will still cost money and will require attention and time of the debtor, this filing type is typically much less expensive, requires less time, and allows the debtor to retain control over assets in the process. 

Consultants at Amplēo have helped many clients reorganize under Subchapter V, including acting as the financial advisor to the first Subchapter V filing ever in the State of Utah. Insolvent companies can look to Amplēo as the premier resource (along with competent legal counsel) to help explore whether a Subchapter V filing is the right course of action.

About the Author: Jade is certified in turnaround work and has been involved with receiverships, restructurings, and bankruptcies. He also serves as the CFO for traditional clients. He earned a bachelor’s degree in finance at Boise State University and a master’s degree in business administration from Brigham Young University’s Marriott School of Management. Jade was a founding board member of a K-8 charter school in Idaho. He loves rugby and coaches a high school rugby club that has four consecutive state championships and one national championship and serves on the board of Rugby Idaho. Outside of rugby, Jade enjoys the outdoors with his family.

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