If you’re struggling under big business debt, you might be directed to a Chapter 11 bankruptcy lawyer. Before you sign up though, find out about Subchapter V, a special, faster Chapter 11 route for smaller businesses, and ask the lawyer if that’s an option. A good one will tell you how it’s different from a standard Chapter 11. If they don’t know what you’re talking about, we’d suggest shopping around. Not all bankruptcy attorneys are alike, which is why you need to research which one is right for you.
At Delancey Street we are not a law firm. We are a business debt settlement company that negotiates with funders and lenders for owners under pressure, and when bankruptcy is the better path, we say so and refer the owner to an independent attorney. Hopefully this article will give you a framework for your conversation with your Chicago Chapter 11 attorney. Here are the seven things we think matter most.
Subchapter V Bankruptcy
First, learn what Subchapter V is. The Small Business Reorganization Act added a new section - Subchapter V - to Chapter 11. It’s designed to help small business debtors reorganize faster and cheaper. But you have to choose it - if you don’t, the normal Chapter 11 rules apply.
Second, not every business qualifies. A Subchapter V bankruptcy is available to a debtor (individual or entity) that is involved in business activity. It also requires that the combined amount of the debtor’s secured and unsecured debts is less than the cap, which is normally $2,725,625, but for one year only was increased to $7,500,000 under the CARES Act. Additionally, at least half of the debts must have arisen out of the debtor’s business activity. A single asset real estate debtor cannot use Subchapter V bankruptcy. Ask your attorney which limit applies to your case.
Third, understand the trustee’s role. A Subchapter V trustee can help a debtor get reorganized and make sure the company is sticking to its financial commitments. However, the trustee will not take the debtor’s assets away or try to sell them. The Subchapter V trustee is more of an advisor or facilitator who wants to help the company reach a voluntary agreement with its creditors. At big hearings, the trustee will be sitting right there at the table. Your company is responsible for paying the trustee’s fees. Build that cost into your budget.
Reorganization Plan
Fourth, the clock moves fast. After filing for bankruptcy, the debtor has to turn over a balance sheet, a statement of operations and a statement of cash flows along with federal tax returns. The court holds a status conference within 60 days of the filing. You must submit a written report of your efforts toward a consensual plan at least 14 days before the conference. The plan itself must be filed within 90 days. Only the debtor may file a plan, which is a real change from a regular Chapter 11, where creditors or a trustee can step in if the debtor doesn’t. The paperwork is lighter, though. You won’t need a disclosure statement under Subchapter V, but you’ll need a plan that has a short summary of how the business operated, an analysis of liquidation, and a projection showing the business will be able to make plan payments. You probably won’t have a creditors’ committee either. It’s all meant to reduce time and costs.
Fifth, your creditors don’t get the final word. In a normal Chapter 11, the creditors vote on whether to accept a reorganization plan. In Subchapter V, though, the debtor can confirm a plan without the creditors’ approval, as long as the plan is not unfairly discriminatory and meets the “fair and equitable” test. However, the creditors still have to get at least as much as they would in a Chapter 7 liquidation. And just like with Chapter 13, the debtor can commit all their projected disposable income (income left over after expenses for themselves and their family and business) to the plan payments for three to five years. Before confirming, the court has to find either that you can actually make all the payments on the plan going forward. Or at the very least, that it’s pretty likely you can, and that the plan has enough safeguards for the creditors if you don’t.
Sixth, the timing of your discharge depends on how the plan was confirmed. If your creditors sign off on the plan, you get your discharge at confirmation. But if you force a nonconsensual plan through, you won’t get your discharge until you’ve made every single payment. The Bankruptcy Code’s usual exceptions to discharge still apply.
Seventh, several smaller provisions can matter a great deal. Under the SBRA, you don’t need to pay everyone else back fully in order to keep your own stake in the company. Plus, the bills you ran up while you were in bankruptcy don’t have to be paid all at once - you can spread those out over the life of the plan, unlike in a typical Chapter 11. Individual small business debtors can potentially adjust their mortgage on their own home if the loan wasn’t used to buy it and it was used mostly for the business. The Bankruptcy Code also lets a debtor recover certain payments made to creditors before filing, but you should be careful before filing a preference claim. Make sure you really have a case, taking into account any possible defenses you know about or should know about. If the claim is under $25,000, you will have to file it in the district where the defendant lives.
The Full Picture
SBRA was designed to help small businesses get out of bankruptcy quicker and cheaper, but it’s still a big question if it’ll deliver on that promise. This list isn’t a complete guide to everything that might help you reorganize. You need to talk to your attorney about the full picture.
And if you aren’t sure bankruptcy is the right move at all, talk to us first. Get a confidential free consultation to see if you can work out a deal for less than the full amount. If Subchapter V is the better fit, we’ll tell you on that first call and point you to bankruptcy counsel.
