Effective February 22, 2020

In 2019, Congress amended the United States Bankruptcy Code by enacting the Small Business Reorganization Act (the SBRA). One of the most important features of the SBRA is the creation of a new bankruptcy option for small businesses, Subchapter V of chapter 11 of the Bankruptcy Code.  Subchapter V is designed to streamline the chapter 11 process and remove some of the challenges for small businesses seeking to reorganize through bankruptcy. See, e.g., Statement of Senate proponents of SBRA.

Initially, Subchapter V was available to debtors with aggregate secured and unsecured debt of no more than $2,725,625.  11 U.S.C. § 101(51D).  However, as part of the CARES Act, signed into law March 27, 2020 as an emergency response to the COVID-19 pandemic, for one year the debt limit has been increased to $7,500,000, opening these provisions to a broader segment of businesses.  See H.R. 748, section 1113.

Some of the major features of Subchapter V include:

1.  Chapter 11 Plan Filed Within 90 Days After the Bankruptcy Filing, And Only Debtor May Propose A Plan. This is different from a typical chapter 11, where the debtor has the exclusive right to file a plan for the first 120 days, and that exclusive right may be extended for up to 18 months if the court finds “cause.”  Once exclusivity expires, other parties may submit a plan.  Eliminating the costs and risk associated with plans being proposed by competing parties, Subchapter V provides that only the debtor may submit a plan.  11 U.S.C. § 1189(a).  Further, Subchapter V requires that the plan be filed within 90 days after the filing of the petition, shortening the length of time in bankruptcy court.  11 U.S.C. § 1189(b).  And an extension is only allowed “if the need for the extension is attributable to circumstances for which the debtor should not justly be held accountable.”  11 U.S.C. § 1189(b). Among other key requirements, unless all classes of creditors vote in favor of the plan, the plan must pay creditors an amount equal to its projected disposable income over a three to five year period.  11 U.S.C. § 1191(c)(2)(A).

2.  Owners May Keep Equity in Company (No Absolute Priority Rule). The absolute priority rule in chapter 11 requires that owners contribute new value to keep their equity in the reorganized company.  That requirement is expressly eliminated from Subchapter V, removing a major financial cost and risk from the reorganization process.  11 U.S.C. § 1181(a).

3.  Discharge. If a plan is consensual (meaning, all classes of creditors vote in favor of it), the debtor will receive a discharge upon confirmation.  If the plan is not consensual, and if the debtor makes its required plan payments, its remaining debts are discharged.  11 U.S.C. § 1192.

4.  Trustees. All Subchapter V cases have a trustee, a professional fiduciary, who oversees the case.  11 U.S.C. § 1183.  The trustee’s role includes investigating the business and financial affairs of the debtor, and may include distributing plan payments.  This role is more limited than the role of a chapter 7 trustee or that of a trustee appointed in chapter 11 case for cause.  Unlike those situations, in Subchapter V the debtor stays in control of its business operations.  That is, the debtor remains a “debtor in possession” unless removed for “cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor.”  11 U.S.C. § 1185.

5.  No Disclosure Statement is Required Unless Ordered by the Court for Cause. In a typical chapter 11, the debtor is required to prepare a “disclosure statement” which the court reviews for adequacy of information as a preliminary step before the plan can be voted on by creditors and confirmed by the court.  This is one of the factors that contributes to the time and expense of a typical chapter 11 case.  Subchapter V eliminates that step from the process unless ordered by the court for cause.  11 U.S.C. § 1181(b).

6.  No Creditors’ Committee. Creditors’ Committees can play an important role in chapter 11 cases.  The committee allows creditors to advocate collectively for the best interests of all of the general unsecured creditors (or other classes of creditors or interest holders).  However, it is also sometimes cited as a major expense that prevents small businesses from utilizing and successfully emerging from chapter 11.  Subchapter V eliminates committees from the process, unless expressly ordered by the court in the case.  11 U.S.C. § 1181(a).

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