Delancey Street is a business debt settlement company. We are not a law firm, and we are not providing legal advice. Owners drowning in merchant cash advance and loan payments often ask us about the formal options, like assignment for the benefit of creditors, receivership, and bankruptcy. Whether an ABC or receivership fits depends a lot on your unique circumstances, and if you decide to go that route, you should get a lawyer, not a debt settlement company. But here we’ll explain Subchapter V and seven ways it is different from the bankruptcy most owners picture.
A Chapter 11 Reorganization Was Designed for Large Corporations
Bankruptcy used to be a death sentence for small firms. A chapter 11 reorganization was designed for large corporations. Technically a small firm could file, but the process was long, costly, and structured to protect creditors over debtors. The owner usually felt overwhelmed by all these burdens. Even if the owner wanted to try, these added to an already heavy load. So an insolvent small business would often choose to file chapter 7, which closed up shop entirely. Subchapter V is a newer, more debtor-friendly alternative.
Subchapter V of Chapter 11
The first difference is who it is for. Subchapter V of Chapter 11 was created by the Small Business Reorganization Act 2019, which went into effect February 19, 2020. It originally had a debt limit of $2,725,625, which the CARES Act raised to $7.5 million on March 27, 2020. The higher limit was meant to be temporary, set to expire after March 26, 2021, so the amount of debt a business can have and still qualify for subchapter V is subject to change. At least half of the debt must be business debt rather than personal debt. You have to be currently engaged in business activities to file under it. But not all businesses were active at the moment the pandemic hit. So far, though, courts have taken a charitable view and ruled that many businesses which closed when stay-at-home orders came down remain eligible to file under Subchapter V.
The second difference is that the doors stay open. Subchapter V lets business owners file bankruptcy without shutting down, if they can show that staying open will generate enough revenue to repay their creditors over time, which here means three to five years. That’s a better chance to keep supporting yourself and serving your customers.
The third difference is about creditors who won’t negotiate. Regular chapter 11 bankruptcies require the okay of at least one impaired class of creditors–the ones not getting paid in full–for the court to approve a reorganization plan. But subchapter V lets the court approve it even if the impaired classes say no, as long as the plan is fair and equitable. It works where creditors refuse to play ball. For small businesses, that can make all the difference. Once you file a bankruptcy case, an automatic stay stops all collection activity. Once the court discharges your debts, creditors can’t try to collect them, and you can’t be sued or held personally liable for them. If you get a consensual plan, you get your discharge at confirmation, before payments start. If you have to force a nonconsensual plan on your creditors, you don’t get a discharge until you complete all of the payments under the plan.
The fourth difference is what “fair and equitable” costs you. All your disposable income goes toward repaying creditors over the next three to five years. You’ll get to use some to support yourself, your dependents, and to operate your business. That means no vacations, but you also won’t be homeless, and you might not have to lay off employees. Fair and equitable isn’t comfortable.
The fifth difference is the plan itself. A chapter 11 plan for a subchapter V bankruptcy includes stuff you’d see in a chapter 11 disclosure statement, like a brief history of the business, a liquidation analysis, and financial projections showing how you’ll repay creditors. The liquidation analysis estimates what the business’s assets would sell for if the business closed in a chapter 7 bankruptcy. The court wants to see that creditors are better off than they would be in a chapter 7 liquidation. Liquidation bankruptcies are tough for unsecured creditors; even if you’re a secured creditor, you can still end up missing out, because distress sales make it hard to get fair value for assets. The test cuts both ways, though. If your struggling business can’t survive the three to five years of paying down debt, liquidating assets, or even converting the case to a chapter 7 bankruptcy that liquidates everything may be where it ends up.
The sixth difference is the trustee. After you file subchapter V, a trustee appointed by the US Department of Justice supervises your reorganization. First you give the trustee a copy of your most recent tax return, plus a statement of operations, a cash flow statement and a balance sheet. The trustee helps you work out a reorganization plan and attends key court hearings. If creditors approve the plan the trustee’s job ends there. But if they don’t, the trustee oversees the whole three-to-five-year repayment. Either way, the trustee doesn’t take control of your assets and can’t sell them. That trustee can also inspect your premises, books and records after giving reasonable advance notice.
The seventh difference is cost. Even though the process is easier, that doesn’t mean it won’t take time and money. If you’re thinking of a subchapter V bankruptcy filing, here’s the math: $1,167 for the case filing fee, plus a $550 administrative fee. The court may let you pay in installments - over 120 days that’s roughly $430 a month, or 180 days for about $286 monthly. And of course there are other professionals to think about - attorneys, accountants, appraisers, auctioneers - they all have a price tag too.
Outside of Court
That said, if you can work something out with creditors outside of court, that’s always preferable. It saves a lot of money. If your creditors won’t play ball, or if you pledged your home for a business loan and don’t want to lose it, subchapter V lets the court approve the plan against their will. Our firm negotiates with merchant cash advance funders and lenders for less than the full balance. We don’t sell another loan, and the first consultation is free and confidential. If there’s a cheaper option out there, or if settlement won’t work, we’ll tell you that on the first call and send you to the right lawyer, such as counsel for subchapter V bankruptcy, when that’s the better path.
