Long and complex court proceedings with lawyers, hearings, appeals and procedure costs can consume your company’s finances. A great number of small businesses find that they can’t make the financial investment to file. The regular Chapter 11 reorganization process can be very expensive, which might not be worth the cost.
Congress enacted Subchapter V as part of the Small Business Reorganization Act in 2019, an amendment to the Code that added a new subchapter for reorganizations of small business debtors. The purpose of the Subchapter is to alleviate the burden of Chapter 11 and provide small businesses with more expedient reorganization options. However, it has some limits that business owners should know.
Subchapter V Saves Time and Money
So the good news is that Subchapter V saves time and money. The more simple process may result in better and quicker outcomes for small businesses in financial distress. That is especially true for a business without the resources to get through a long, complicated case. Fees are part of it too. A traditional Chapter 11 debtor pays United States Trustee fees and usually covers the cost of a committee of creditors. The creditors’ committee’s role is to negotiate on behalf of the unsecured creditors, so it hires its own legal counsel and experts. So, if you’re a small business, how do you run a business and satisfy the obligations of a creditors’ committee? Subchapter V eliminates the U.S. Trustee fees, and unless the court orders otherwise for cause, there is no need for a committee and no need to add the administrative expenses that the committee brings.
Whenever a business files, a Subchapter V Trustee is assigned to the case, but not to run your company. Rather, the trustee functions as a facilitator that can help assist the company in successfully reorganizing under Subchapter V. In practice, the trustee will often work with the creditors and the owner to work out a repayment plan for the debts.
Another advantage is control. Only the debtor may file a plan in Subchapter V, so no creditor can throw up a reorganization plan and interfere with the debtor’s control of the process.
What’s the absolute priority rule and how is it relevant? Normally in a Chapter 11 case, a business has to pay its creditors in full before owners or equity holders get or keep any assets. Subchapter V gets rid of that requirement. The owners can retain ownership interests while creditors still get a fair and equitable distribution. The plan confirmation process also gets simplified, and that makes it easier to successfully reorganize.
The early numbers are strong. Monthly figures from the Executive Office for United States Trustees covering 2020 through October 2024 show that cases filed under Subchapter V are almost twice as likely to get a confirmed plan, 20 percent less likely to be dismissed and nearly four months faster on average to reach confirmation, when compared to similar small business cases that do not choose to proceed under Subchapter V. These statistics indicate that there is strong benefit in pursuing Subchapter V for a small business.
What Are the Drawbacks of Subchapter V
“Benefit” is a relative term in bankruptcy; benefits always come with costs. With so many benefits, what are the drawbacks of Subchapter V? Not every small business may qualify. To qualify for Subchapter V you have to opt-in, and your company has to be engaged in commercial or business activity at the time you file. Most courts have interpreted this broadly, so even winding down a business could qualify. In addition, at least half of your debt has to be commercial or business related.
The debt limit is where most owners run into trouble. You can’t file if you have more than $3,024,725 (the current cap) in combined, noncontingent, liquidated, secured and unsecured debt, figuring all the debt as if your businesses are filing together. This means many businesses that could really use Subchapter V don’t have a shot at it because they owe too much money.
That ceiling has moved. The Small Business Reorganization Act (SBRA) took effect in February 2020, with a debt ceiling of $2,725,625. A month later, the COVID-19 pandemic hit, and Congress passed the CARES Act, temporarily raising the debt ceiling to $7.5 million. Congress extended the higher debt ceiling twice, through June 20, 2024. In April 2024, another bill to extend the higher debt ceiling to June 2026 died in the Senate. On June 21, 2024, the debt ceiling reverted to $3,024,725, adjusted for inflation. Before that drop, Subchapter V filings were increasing. In fact, in April 2024, they were up 60 percent over April 2023 and in April 2023 the number was up 81 percent over April 2022. It’s too early to tell how much the new limit will impact filings but it’s probably a safe bet that there will be a significant impact.
Even for a business that qualifies, Subchapter V is not the guaranteed, magical solution to all of your small business’s ills. While Subchapter V makes the process simpler and less expensive, it doesn’t make bankruptcy free. And, though it’s less expensive and far simpler than a Chapter 11, the process still takes time and money.
Is Subchapter V Worth It
So, is Subchapter V worth it? Its overall goal is to offer a less expensive, less painful path to reorganization and a better chance of success, but only for the companies that meet the qualifications and don’t have a fortune to spend on lawyers. If that is you, it’s probably a good idea. In short, a Subchapter V case is often a more efficient way to reorganize, and more affordable, but it isn’t a home run. If your debt is over the limit, or bankruptcy is not the right fit, there are other ways to deal with creditors, and they deserve a look too. If you are a business owner in financial trouble, find out if Subchapter V is right for you or whether another path makes more sense. The last thing you want to do is ignore the situation and let it drag on.
