Subchapter V bankruptcy is the newest type of bankruptcy for small businesses. A result of the Small Business Reorganization Act of 2019, this type of bankruptcy became available to small business owners in February of 2020.
As a subsection of Chapter 11 of the bankruptcy code, Subchapter V bankruptcy has many of the same requirements and outcomes, but it is meant to help small business owners get through the St. Louis and Illinois bankruptcy process more quickly and cost them less money.
The end result is a new way to file a small business bankruptcy to discharge your debts while maintaining equity in your business.
A New Type of Bankruptcy for Small Businesses
Before Subchapter V bankruptcy was enacted, businesses could file three main types of bankruptcy under the right circumstances: Chapter 7, Chapter 11, and Chapter 13.
Each of these types has pros and cons and different requirements, but Subchapter V was specifically designed to benefit small business owners. The following are some of the key benefits of Subchapter V bankruptcy for small business owners:
- With some exceptions for fraud and similar issues, you are allowed to maintain equity in your business during and after the bankruptcy.
- You do not have to pay some of the quarterly administrative fees Chapter 11 requires.
- As the debtor, you are the only person allowed to file a reorganization plan to discharge your debts. Creditors may not file competing plans.
- In Subchapter V bankruptcy, your creditors do not vote to approve or deny your reorganization plan.
- As the debtor, only you are allowed to modify the plan after approval. That means your payments remain stable.
How Subchapter V Bankruptcy Can Help Small Businesses
Subchapter V bankruptcy allows you to restructure your sole proprietorship, partnership, or corporation in order to get back to making a profit. You come up with a plan that will restructure your business to repay some of your creditors, discharge certain debts, and get your business back in the black.
That means this type of small business bankruptcy provides a lifeline for you that is meant to keep you in business. Where other types of bankruptcy can signal the end of a small business, Subchapter V signals a new beginning.
The Subchapter V Bankruptcy Process
Filing Subchapter V bankruptcy is at the sole discretion of the debtor and business owner — you, in other words. Once you have decided to file for this type of bankruptcy, the process moves quickly. Subchapter V was designed to move much faster than Chapter 11 to get small businesses the debt relief they need as quickly as possible.
Here is a basic outline of the Subchapter V bankruptcy process:
- To begin the process, you file a Subchapter V bankruptcy petition, tax returns, cash flow statements, balance sheet, and statement of operations with the court.
- The court appoints a Subchapter V trustee. This trustee will oversee the formation of your reorganization plan but will not take control of your business assets except in specific circumstances.
- Within two months of your filing, the court will hold a conference to assess the status of your case.
- Two weeks before this conference, you must submit a written statement that describes your past and planned efforts to reach a consensual reorganization plan.
- Within 90 days of filing your Subchapter V petition, you must file your reorganization plan.
- If your plan is reasonable — i.e., you should be able to make the payments and there is a defined remedy for creditors if you fail to make the payments — the court should approve it.
- When your Subchapter V plan of reorganization is confirmed, you receive a discharge. (Note that if your plan is non-consensual, meaning your creditors did not consent to it, your debts will be discharged after you have successfully made the payments outlined in your plan.)
Subchapter V Bankruptcy FAQ
Like most forms of bankruptcy for small businesses, Subchapter V bankruptcy is complex. But, because this type of bankruptcy is relatively new, business owners are likely to have even more questions than usual.
We have the answers. Below, we have outlined some of the most common questions about Subchapter V bankruptcy.
When Is Subchapter V Preferable to Simple Chapter 11 Bankruptcy?
Subchapter V bankruptcy is a new type of Chapter 11 bankruptcy. Small business owners may elect this type of bankruptcy when they need to speed up the process and reduce administrative fees.
Who Is Eligible for Subchapter V Bankruptcy?
Generally, small business debtors are eligible to file under Subchapter V. But there are some limitations. The total of your secured and unsecured debts must be less than $2,725,625. You may also be excluded from this type of bankruptcy if your main business activity centers on real estate with just one asset.
When Is Subchapter V Preferable to Chapter 7 Bankruptcy?
Because Chapter 7 bankruptcy for small businesses involves selling nonexempt assets, this form of bankruptcy very often means that the business must close. Subchapter V bankruptcy, on the other hand, is designed to restructure your business to pay and discharge debts and keep operating. Subchapter V may allow you to keep your business running when Chapter 7 will not.
When Is Subchapter V Preferable to Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is only available to individuals and sole proprietors, so it may not be an option if your business is not a sole proprietorship. Like Subchapter V, Chapter 13 allows you to restructure your business and keep your assets. If you are a sole proprietor, a bankruptcy attorney can help you decide which type of bankruptcy is right for your case.
What Is a Subchapter V Trustee?
When you file for Subchapter V bankruptcy, the court appoints a trustee who will oversee the formation of your plan of reorganization. Unlike in other types of bankruptcy, this trustee does not take control of your assets. Instead, they take on a mediator-like role between you and your creditors to help you form a consensual reorganization plan. Debtors are responsible for compensating Subchapter V trustees.
Does the Absolute Priority Rule Apply to Subchapter V?
No. In a typical Chapter 11 bankruptcy, the absolute priority rule requires that creditors vote to accept your reorganization plan or are paid in full in order for you to retain equity in your business. In Subchapter V, your plan must treat creditors fairly, but they do not have to approve it. And you can retain your equity interests in your business.
What Is the Debt Limit for Small Businesses to Reorganize Under Subchapter V?
The debt limit for Subchapter V bankruptcy is $2,725,625. This covers all of your business debts, including secured and unsecured debts.
What Is Required for a Court to Approve a Subchapter V Plan of Reorganization?
Given that you have provided all of the necessary documents and information, the bankruptcy court will examine your reorganization plan to look for one of two main factors:
- You will be able to make all the payments your plan calls for.
- You will likely be able to make the payments, and if you don’t, your plan lays out remedies to compensate your creditors for the failure to stick to the payment plan.
If one or both of these statements is true of your plan, the court will likely approve it.
What Is a Subchapter V Cramdown?
In Subchapter V bankruptcy, a court can approve your plan of reorganization despite objections from your creditors as long as the plan is fair. This approval against the creditors’ will is called a “cramdown.” For your case, if your reorganization plan is approved via cramdown, that means you have a nonconsensual plan. With a nonconsensual plan, your trustee remains in place and you won’t get a discharge until after you have completed your payments.
How Long Do Payments Last in Subchapter V Bankruptcy?
Payment plans in this type of bankruptcy for small businesses typically last for three to five years. If your reorganization plan is consensual, you will receive a discharge after the court confirms your plan. If your plan is nonconsensual, you will get a discharge after you have made all the required payments.
How Long Do I Have to File My Subchapter V Plan?
After you file your initial Subchapter V petition, you have 90 days to file your plan of reorganization.
Can I Keep My Small Business in Subchapter V Bankruptcy?
Yes. This type of small business bankruptcy is designed to keep your business running and get it back to profitability.
Can Creditors File Competing Reorganization Plans in Subchapter V?
No. As the debtor, you are the only person who can file a reorganization plan if you are pursuing Subchapter V bankruptcy.
Does My Subchapter V Attorney Have to Be a ‘Disinterested’ Party to My Estate?
If you are filing for Chapter 11 bankruptcy and owe your attorney unpaid fees, they cannot represent you in your bankruptcy case. The rule for Chapter 11 holds that anyone you receive services from in filing bankruptcy must be “disinterested” in your estate. But in Subchapter V bankruptcy, the rule has changed. If you owe an attorney or other professional less than $10,000, they can still represent you in your bankruptcy case.
Who Can Modify a Subchapter V Plan After Confirmation?
Only the debtor — the small business owner — may modify a Subchapter V plan after the court has confirmed it. This provides stability in your payments and budget.
Is Subchapter V Bankruptcy the Only Type of Bankruptcy for Small Businesses?
No. Subchapter V is a sub-type of Chapter 11 bankruptcy, which also applies to small businesses. In certain cases, small business owners and sole proprietors may be able to file Chapter 7 and Chapter 13 bankruptcy, too. Chapter 12 can also apply to family farmers and fishermen. An experienced small business bankruptcy lawyer can help you identify which type of bankruptcy for small business is right for your case.
Reach Out to A Bankruptcy Law Firm, LLC
For help filing Subchapter V bankruptcy, contact the small business bankruptcy attorneys at A Bankruptcy Law Firm, LLC. We are happy to walk you through the process, give you an honest assessment of your case, and answer any questions you have during a free Subchapter V bankruptcy consultation. To get started, call us at (800) 7-BENSON or contact us online.