Subchapter V Bankruptcy: A Lifeline to Small Businesses

By Charles N. Persing, CPA/CFF, CFE, CIRA, CVA On Feb 14, 2022

In 2019, Congress passed the Small Business Reorganization Act, known as Subchapter V, to chapter 11 of title 11 of the United States Code. Subchapter V filing provides a faster and less expensive reorganization process for lower- and middle-market companies that generally fail under traditional chapter 11.

Are you a candidate? The best Subchapter V candidates are debtors with issues that can be fixed by the bankruptcy process, including reduction/restructure of debt payments, lease issues, and/or other issues that, when modified, allow the debtor to make a profit (disposable income). Debtors are typically individuals or entities engaged in commercial or business activities, with less than $7.5 million (including payables) of debt. At least 50% of the debt must come from commercial or business activities.

If the debtor is not able to reliably produce income and cash flow, the chances of success greatly diminish, as creditors are entitled to recover more than a chapter 7 liquidation.

When to seek help: With proper planning and execution, Subchapter V can be a lifeline for small businesses. Unfortunately, many businesses seek help when they have exhausted their capital reserves, and have likely provided significant personal assets, obtained high risk loans, and/or have not paid taxes to make ends meet. Don’t wait until this happens to seek help.

Getting ready to file: Make sure your books and records are up to date, including tax returns. The petition requires a significant amount of information based on the company’s records.

The Subchapter V bankruptcy timetable is fast. Your plan of reorganization will have to be submitted within 90 days of filing. The plan must include a brief history, a liquidation analysis, and projections. Big picture items of Subchapter V include:

The Subchapter V Trustee (limited role) is appointed instead of a creditors’ committee.

The debtor must voluntarily elect Subchapter V and is in control of the process. The debtor is the only one who can propose a plan of reorganization, which may be confirmed without any creditor voting to accept it.

Disclosure statements are not needed to solicit votes from the creditors.

Lien Stripping/Mortgage modification – as long as the proceeds from the mortgage were used for the debtor’s business and not the purchase of the residence, the debtor may modify a mortgage on the principal residence.

Although the United States Trustee sets and presides over the Initial Debtor Interview and 341 meetings, there are no US Trustee fees.

Debtor may now retain a pre-bankruptcy professional (attorney or accountant), who has a pre-petition claim of less than $10,000.

Debtors may obtain a discharge upon completion of plan payments and retain equity interests without investing additional funds.

About the Author: Charles N. Persing, CPA/CFF, CFE, CIRA, CVA, is a partner at Bederson LLP and is a Subchapter V Trustee in the Eastern and Southern Districts of New York. As a member of the firm’s insolvency and litigation team, Persing serves as financial advisor to Chapter 7 trustees in the mid-Atlantic region. His practice includes providing reorganization, business valuation, turnaround consulting, litigation services, commercial dispute management, and more. He can be reached at [email protected].

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