By: James LaMontagne
April 19, 2020
Chapter 11 of the Bankruptcy Code allows struggling businesses to reorganize while retaining control of their assets and operations. It provides invaluable tools for a business to, among other things, restructure debt and do away with burdensome contracts. But the chapter 11 process is often slow and expensive, prohibiting smaller businesses from efficiently utilizing this reorganization option.
In February 2020, this problem was addressed with the enactment of the Small Business Reorganization Act (SBRA). The SBRA amended the Bankruptcy Code to add a new streamlined chapter 11 process for small businesses. This new process, found in Subchapter V of Chapter 11 of the Bankruptcy Code, aims to make bankruptcy proceedings more expeditious and less costly by eliminating certain procedural hurdles, expediting timeframes within which a debtor must file its plan of reorganization and waiving certain administration costs. As enacted, just prior to when the COVID-19 crisis began to take hold, a debtor (whether an entity or an individual) is eligible to file a Subchapter V case if engaged in business and having total secured and unsecured debt not exceeding $2,725,625. However, in an effort to provide greater access to the Subchapter V process, the CARES Act amended Subchapter V by temporarily increasing, for the next 12 months, the debt limits from $2,725,625 to $7,500,000, thereby making available these new streamlined chapter 11 procedures to many more small businesses.
Why should a Subchapter V bankruptcy case be an attractive option for financially distressed smaller businesses? Subchapter V affords a debtor all of the advantages of a traditional chapter 11 case (the ability to restructure and cramdown debt, the ability to reject unfavorable leases and contracts, and, at the end of the process, a financially healthier debtor) but through a quicker and less expensive process. In a Subchapter V case,
- Only the debtor may file a plan of reorganization thereby preventing adversarial creditors or other parties-in-interest from filing, or threatening to file, a competing plan, ensuring a less costly process to the debtor.
- The debtor must submit its plan of reorganization within 90 days of filing bankruptcy, unless extended for cause by the court, thus ensuring a speedy process.
- A trustee is appointed in each case and his/her primary task is to facilitate a consensual plan of reorganization, thereby providing the debtor with an independent third party to assist in expediting the process.
- No disclosure statement is required. In a traditional chapter 11 case, before a bankruptcy court will consider approving a plan of reorganization, the plan proponent must prepare, file, obtain court approval of and serve a disclosure statement (that document that provides significant detail of the debtor’s history, finances and reorganization plan for review by creditors). In eliminating the burdensome requirement for a disclosure statement, Subchapter V quickens the chapter 11 process and reduces time and money spent by all parties.
- There is no creditors’ committee. In a traditional chapter 11 case, unsecured creditors have the opportunity to form a committee to represent the entire class of unsecured creditors. This committee, once formed, always retains counsel at the debtor’s expense. By eliminating creditors’ committees, Subchapter V reduces the debtor’s chapter 11 costs.
- Fees owed to the federal government are eliminated. In a traditional chapter 11 case, a debtor pays quarterly fees to the federal government based upon the debtor’s disbursements for that particular quarter. The fees can be as high as 1% of the disbursements or $250,000.00, whichever is less. By eliminating these fees, Subchapter V reduces the debtor’s overall chapter 11 costs.
As a result of the SBRA and Subchapter V, chapter 11 should become a less expensive and more manageable process for small businesses, providing a restructuring opportunity that otherwise may have been too costly and too unpredictable. While small businesses are encouraged to communicate with lenders, landlords, vendors and other parties in interest to allow for a restructuring outside of court, with the CARES Act expanding eligibility for Subchapter V cases, more small businesses will be able to take advantage of this new streamlined chapter 11 process if a bankruptcy filing is needed.