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Subchapter V Bankruptcy Basics

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Before Subchapter V of the bankruptcy code was enacted into law, business debtors that needed bankruptcy protection generally had to file under Chapter 7 or Chapter 11. Chapter 7 is a liquidation procedure where business assets are sold to satisfy creditor debt. Chapter 11 is a reorganization attempt where businesses restructure debt in order to continue operations.

Not Many Options

Chapter 11 is unfortunately a very expensive procedure, and that fact alone puts the process out of reach for many troubled small businesses. Businesses fail when they run out of cash and

finding tens of thousands of dollars to finance a Chapter 11 bankruptcy procedure is many times prohibitive for small businesses. While Chapter 7 liquidation is generally cheaper than a Chapter 11 filing, Chapter 7 generally means ceasing operations.

Subchapter V

The Small Business Reorganization Act was enacted into law in 2020, and the Act created a new bankruptcy subchapter of Chapter 11 called Subchapter V. To file a Subchapter V petition, small debtors must meet the following requirements:

  • Operate a commercial business that is not a single asset real estate entity.
  • Have unsecured and non-contingent debts of no more than $2,725,625.00. (This amount was temporarily raised to $7,500,000 until March 27th, 2021).
  • File a reorganization plan within 90 days of the Chapter V petition filing.

Subchapter V, like its older sibling Chapter 11, is a restructuring and reorganization procedure, but the costs are considerably less than a Chapter 11 filing. Chapter 11 filings can cost in excess of $25,000 where a successful Subchapter V can be accomplished for substantially less. In addition:

  • The debtor can take up to five years to pay creditors.
  • Any administrative expenses can also be paid over a five year period.
  • Like a personal Chapter 13 proceeding, debts are discharged at the end of the plan after agreed upon payments have been made.
  • Unlike Chapter 11, there is no automatic establishment of a creditor committee unless cause is shown.

Subchapter V Trustee Limitations

In other business bankruptcies, a trustee with formidable power must be appointed. The Subchapter V trustee, however, is more a negotiation facilitator, and the debtor remains in control of the business. The Subchapter V’s trustee does not necessarily commence a detailed debtor financial investigation.

Mini Chapter 11

Bankruptcy attorneys, trustees and courts have likened the new Subchapter V to a mini-Chapter 11 proceeding. The process certainly fills the gap between Chapter 7 and Chapter 11 as small business owners now have a viable option for bankruptcy protection other than a prohibitively expensive reorganization under Chapter 11 or a business-ending Chapter 7 liquidation.

Seek Professional Counsel

While there have been cases where a business debtor has successfully completed a Chapter 7 or even a complex Chapter 11 plan pro-se  (self-represented), it is generally not a good idea to represent yourself or your business in a bankruptcy proceeding. The services of a good and well-experienced business bankruptcy attorney are paramount. Therefore, if you are contemplating any type of business reorganization, call a New York City business bankruptcy attorney at the Law Office of Harry D. Lewis at 212-859-5067 or contact us online.

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