The owners we talk to at Delancey Street use very similar wording when they describe how they got themselves or their company into so much debt. They often say, “I don’t know what happened. It all just happened so fast. There wasn’t time to think things over, and now I’m in this mess.” There are some obvious things you can do if you need some space from your creditors. Negotiating with funders and lenders, which is what we do as a business debt settlement company, is one. There’s also a more aggressive way, which is to file for business bankruptcy. We are not a law firm and don’t file cases, but if bankruptcy is what it takes to save your company, a small business in Raleigh may be able to use Subchapter V of Chapter 11, a faster and less expensive reorganization path for small business debtors. Here are some facts to consider when evaluating whether Subchapter V is a viable option for reorganizing your Raleigh business.
Not Every Struggling Business Qualifies
The first is that not every struggling business qualifies, and the debtor can be a company or an individual. Make sure your business has commercial activity, total debts of less than $2,725,625, at least 50 percent of that debt is for business purposes, it is not a single-asset real estate business, and you have elected for it. Unless a debtor elects Subchapter V, the regular Chapter 11 rules apply.
The second is that the petition is not the only thing you file. When filing for Subchapter V, a debtor needs to provide a balance sheet, statement of operations, cash flow statements, and federal tax returns. In practical terms, this means having a fair amount of paperwork available to the court and the trustee, so it’s important to keep it all in order and ready to go.
The Subchapter V Trustee
Third, you get a trustee in a Subchapter V case. But that doesn’t mean you have to give over your assets to your trustee. The Subchapter V trustee is very different than the trustee in a typical bankruptcy: The trustee does not take possession of the debtor’s business or sell any of the debtor’s assets. He or she acts more like a consultant to the debtor, providing a service to the court and the debtor to help fashion a consensual plan. The trustee attends significant hearings in the case and ensures that payments under the plan are made on time. The debtor pays the trustee.
A Case Moves at Hyper-speed
Fourth, Subchapter V prioritizes speed. Next to a traditional Chapter 11, a case moves at hyper-speed. Within 60 days after the case is filed, the court holds a status conference. At least 14 days before that hearing, the debtor files a written report on the efforts made, and to be made, to reach a consensual plan. The plan must be filed within 90 days of the filing of the petition. Only the debtor can file a plan; in a regular Chapter 11, creditors or other parties in interest may file one if the debtor doesn’t within a certain period. There is no disclosure statement, and the plan must include a brief history of the business, a liquidation analysis, and projections demonstrating that the debtor can make all proposed plan payments. That matters, because the regular Chapter 11 disclosure statement is meant to give creditors enough to vote on, and in practice bankruptcy courts get bogged down in debates about what information is required, which means delay. There is rarely a committee, although a committee may be appointed.
Fifth, in a regular Chapter 11, creditors vote on a plan. In Subchapter V, they can’t stop the debtor from confirming a plan if the requirements are met. In particular, the plan cannot discriminate unfairly against a class of creditors and it must be fair and equitable. The creditors must receive at least as much under the plan as they would have in Chapter 7. The debtor can contribute all of its projected disposable income to make plan payments, like a Chapter 13 plan, for 3-5 years. Projected disposable income is anything after expenses to maintain and support the debtor or a dependent and expenditures necessary for business operations. The court confirms the plan if the debtor demonstrates the ability to make the plan payments or there is a “reasonable likelihood” the debtor will make the plan payments and the plan contains “appropriate remedies” to safeguard creditors if payments are not made as proposed.
Sixth, the timing of the discharge depends on the plan. You get it early if everyone agrees, or late if they don’t. If the debtor has filed a consensual plan, the discharge will occur upon confirmation. If the debtor has not filed a consensual plan, then the discharge will occur upon the completion of plan payments. For example, if the debtor has a plan of three years duration to pay its debts, the discharge will occur after the completion of the three years.
The bottom line is that Subchapter V is designed to move quickly. If you are weighing it against a negotiated settlement with your funders and lenders, evaluate your case with this swift path in mind. Our first consultation is free, and when bankruptcy counsel is the better path, we say so and refer you to an independent attorney. Bankruptcy isn’t always the right choice, but it is the right choice for some. However, there is value in understanding your alternatives.
