For the small-business owner, there are plenty of concerns you might have about bankruptcy, and they all come with a price tag. Sometimes it may feel like it costs more just to get help than it’s worth, especially if you’re struggling to pay the bills as it is. The reality is that lawyers, court fees, and trustees are all part of the cost of filing bankruptcy, and they have to be paid with whatever assets you have left. And those fees can mount up quickly.
One option built with that problem in mind is Subchapter V of Chapter 11, added to the bankruptcy code by the Small Business Reorganization Act. Congress wanted it to make bankruptcy a more affordable and accessible way to get out of debt. In other words, it was designed to be cheaper than regular Chapter 11 bankruptcy. And this was no accident. But what makes a Subchapter V case cheap, and what should a business owner expect in terms of costs?
Who is eligible for Subchapter V? At first the law defined “small business debtor” as someone with less than $2,725,625 of noncontingent, liquidated debts. But as part of its COVID-19 relief package, Congress had extended eligibility for the program until March 2022 to businesses with noncontingent, liquidated debts of $7.5 million or less. In either case, you’re still going to have to elect Subchapter V to take advantage of it. Those figures date from the law’s early years, so ask a bankruptcy attorney what the limit is when you file.
Part of the answer is in what the law strips out. For one thing, only the debtor can come up with a plan. No disclosure statement is usually needed. And there’s a form plan the debtor can use. There’s also no need for a creditors’ committee to be appointed, which means no committee fees. And Subchapter V does away with the absolute priority rule, and a plan can be crammed down even if all creditor classes vote against it. Those requirements are just expensive to adhere to, and this code section undoes them. The result is fewer things to pay for.
The most prominent change, though, is the Subchapter V trustee, who is unlike any other trustee in bankruptcy. That trustee’s job is to function as a facilitator of sorts. He or she also has the responsibility to help formulate and negotiate a plan of reorganization, and under section 1183 of the Bankruptcy Code the goal is a consensual one. The trustee’s powers are otherwise mostly contingent. The trustee may examine and object to proofs of claim “if a purpose would be served.” The trustee is not required to investigate the debtor’s financial affairs unless the court orders it to do so. And the court can expand a Subchapter V trustee’s duties to those of a traditional Chapter 11 trustee if circumstances warrant. The idea is not to turn the business over to a court-selected third party, but rather to help the debtor sort its problems out. That work can be expensive too. But what is this new type of trustee supposed to cost?
The Costs of the Trustee
Be prepared to pay thousands of dollars for a Subchapter V trustee. The Subchapter V trustee is paid from the debtor’s estate, so the debtor gets hit with that money right off the bat. Trustees bill by the hour and they are going to bill you whether you need them or not. In any case, the trustee is going to be looking at the pleadings, meeting with the debtor for the first time, participating in the mandatory status conferences, the confirmation hearing and other key hearings. There’s no getting around that.
Even so, the Subchapter V option really can be cheaper. Subchapter V did eliminate the quarterly fees, so more money can be used to offset the costs of the trustee. And there’s no creditors’ committee, so a company isn’t stuck with paying committee counsel’s fees. A real “Plain Vanilla” Chapter 11, for example, is bound to involve some committee costs for professional fees and has to meet many more mandates. The biggest savings, however, is that the trustee is now focused on moving the parties toward a consensual plan, and away from contentious litigation and plan objections.
In most cases the trustee acts less like a traditional Chapter 11 trustee and more like a mediator or consultant. Creditors and debtors will fight. Often when they fight, a judge has to tell them how to play the game. A Subchapter V trustee, though, helps the parties work it out. One attorney who has served as a Subchapter V trustee described a case in which the secured creditors disagreed sharply over the priority of their claims, and a heavily contested confirmation, and maybe multiple adversary proceedings, looked possible. Every day the case looked like it was going to be a mess. Instead, the Subchapter V trustee stepped in with an all-day settlement conference, talked to all sides, and got a consensual plan worked out. That same attorney also described a second case in which the trustee worked hard to get the debtor and its largest creditor negotiating, and without the trustee that dialogue may not have happened, or it may have happened but only after a complaint or contested matter. That’s a whole lot cheaper.
Unlike a mediator, though, the trustee is not strictly neutral. Some creditors’ lawyers argue that Subchapter V favors the debtor, because there’s no committee funded by the estate, creditors cannot file a competing plan, and the plan can be confirmed even if every class of creditors objects. Well, there’s the trustee, as a check on that. The trustee’s job is to get a consensual plan, not simply a confirmed plan. The trustee must keep the interests of all parties in mind. The trustee can object to a claim or oppose a plan if the parties cannot agree. If a plan tries to push too far, the trustee is going to push back.
Another worry is that the trustee’s role is loosely defined, so how well facilitation works depends on the skills and choices of the person appointed. The early numbers are encouraging. A study on Subchapter V cases filed in 2020 appeared in the October 2021 issue of the ABI Journal. Its authors, Michelle M. Harner, Emily Lamasa and Kimberly Goodwin-Maigetter, called it “Subchapter V Cases by the Numbers.” The data was only through the end of June 2021, but of the cases then, the study noted that a plan of reorganization had been confirmed in half of them. Only 19% had been dismissed, and the rest were still pending, of course. Of the confirmed plans, about 59% were consensual; debtors generally reached confirmed plans within six months of filing. As the authors put it, “[s]mall businesses appear now to have a restructuring tool that is both affordable and effective for addressing their financial needs.”
So what should this kind of debt relief cost? No bankruptcies are cheap, but Subchapter V can be. It is designed to be a simpler and more affordable process for debtors. While the trustee can’t be free, and is likely to cost thousands of dollars, the money saved on quarterly fees, committee counsel and fights that never reach a courtroom can make the case cheaper overall than a traditional Chapter 11 It’s affordable, but it isn’t free. But if the goal is to keep the company alive, and that’s usually what the debtor wants most, it may be a way worth exploring. Delancey Street is a debt settlement firm, not a law firm, and bankruptcy is a legal process. If you’re a small business owner who is considering filing bankruptcy, consult with an attorney experienced in handling the matter as quickly as possible.
