Owners weighing bankruptcy often hear Subchapter V and Chapter 11 described as two separate options. So, let’s be very clear: both are Chapter 11. Subchapter V is a subset of Chapter 11 that has faster, less expensive, and less formal requirements. Subchapter V was designed specifically for small businesses to streamline the filing process and use less time and resources. The catch is that the speed and the savings come partly out of your creditors’ hide. A Subchapter V case strips away several of the protections creditors usually have in regular Chapter 11, like the right to negotiate payment terms in exchange for their approval to allow a reorganization plan to go forward. Not a deal-breaker for all, perhaps, but a big difference. For an owner, most of those differences cut in your favor. For your creditors, they cut the other way.
Not every company gets in, though. Put simply, if the aggregate amount of your noncontingent, liquidated secured and unsecured debt (the total amount that you owe your lenders and other creditors) is $3,024,725 or less, and if at least 50% of the aggregate amount of your debts accrued as a result of commercial or business operations, then you qualify. Contingent and unliquidated debt are excluded from that amount, as are your affiliate’s debts. Even so, it’s a mixed bag for what constitutes noncontingent, liquidated debts under Subchapter V. Courts do not always agree on which debts count as contingent or unliquidated. In 2020 the CARES Act raised the cap to $7.5 million, but that higher limit expired in June 2024, and far fewer businesses now qualify.
In a Subchapter V case, a creditors’ committee will not be appointed unless the court specifically so orders. Without a committee, there is no need to pay professional fees on estate funds and more is available for creditors. After all, the whole point of the Subchapter V procedures is to reduce costs in order to facilitate reorganizations. A Subchapter V trustee is appointed in every case to monitor and oversee the company, its performance and its financial state. The trustee can help the parties with negotiations. For unsecured creditors, a creditors’ committee is one of the important creditor protections that is eliminated in the Subchapter V process. Unsecured creditors on their own may not have sufficient bargaining power to protect themselves.
You don’t have to file a disclosure statement, so you save a lot of time and money. The flip side is that lack of a disclosure statement means creditors receive less information. Traditionally, a Chapter 11 case starts with the debtor’s plan, but once the debtor’s exclusivity period expires, creditors can file their own plan. And, even if the debtor objects to the creditors’ plan, they can still get it confirmed. (Cool trick, huh?) In Subchapter V, only the debtor can file a plan. Further, the plan must be filed within 90 days of the petition date, forcing all parties to sort things out in a timely fashion (if not a hurry-up fashion). Bottom line: there’s no time for nonsense here.
Under a regular Chapter 11 case, all the unsecured creditors have to be paid in full before the equity holders can receive anything under the plan. That is the Absolute Priority Rule. And, in order for the plan to be confirmed in a traditional Chapter 11 case, at least one impaired creditor class must vote for it. Thus, creditors have a lot of leverage in a regular Chapter 11 case. Under Subchapter V, there’s no Absolute Priority Rule and no voting. So, take away the creditors’ leverage, and you have a Subchapter V case.
Under Subchapter V, the owners are not required to contribute any new value to be left with all or part of the ownership stake of their business. In fact, the owners keep the company even if the unsecured creditors don’t get paid in full, and regardless of whether the unsecured creditors object. There is no requirement to get the unsecured creditors to vote. The benefit, of course, is that a small business under Subchapter V has the right to have a plan approved by the bankruptcy court without creditor approval, if certain conditions are met. It can simplify and save you time and money, instead of requiring you to hold a creditors vote. The main condition is that the plan be “fair and equitable.” In practice, the “fair and equitable” requirement means that 100% of projected disposable income for 3 to 5 years (the court selects the period) is distributed to creditors (unless the plan provides at least that much value in other form).
Look at it from the other side of the table. Without a creditors’ committee, unsecured creditors have more limited mechanisms for making their voice heard. And they can’t leverage their claim by declining to vote for your plan until the terms suit their needs. If you proceed with Subchapter V, your creditors will have less say and you may get a better deal and lower costs.
Subchapter V Can Be a Powerful Tool
So where does all of this leave you, the owner? If you qualify for Subchapter V, you have a lot of good tools at your disposal. You don’t need a disclosure statement? Great! You don’t need to pick a creditors’ committee? Cool! You don’t have to follow the Absolute Priority Rule? Whoopee! But to make any of these benefits work for you, you need to be ready for an accelerated speed-bump ride. In Subchapter V, everything takes place fast and furious. The plan is due within 90 days, and you’re required to contribute all the projected disposable income for 3-5 years in order to retain control of the company.
If your debts are over the cap, traditional Chapter 11 is the road, and it is a different experience. Expect a disclosure statement, a creditor vote, possibly a creditors’ committee paid for out of the estate, and the risk of a competing creditor plan once your exclusivity period ends. And unless your unsecured creditors are paid in full, you may need to put in some new money into the business, if you want to keep your business.
If you plan to reorganize your business and keep control, Subchapter V can be a powerful tool in achieving your goals. Subchapter V is probably not ideal for every business, but if you qualify and need it, it can help.
