BANKRUPTCY CORNER Subchapter V - A New Choice for Small Business BRIAN MCMAHON For years, the bankruptcy code has provided inadequate relief for small businesses and individuals that incur business debt in excess of $400,000.00. This debt usually results from defaulted small business loans or breached leases. In the past, individuals with unsecured debt exceeding $400,000 did not qualify for chapter 13 relief and were stuck with the rigors of Chapter 11. On February 19, 2020, Subchapter V of Chapter 11 of the U.S. Bankruptcy Code became effective. The new subchapter to Chapter 11 is designed to streamline the Chapter 11 process for small businesses and individuals. It offers relief for small business debtors with debt less than $2,725.625. Small business debtors can also be individuals in which over 50% of their debt arises from business. Although it has been called a “big Chapter 13,” there are some differences from a chapter 13. As in chapter 13, a trustee appointed. The trustee has the duties of, among other things, investigating the activities of the debtor, reviewing claims, filing reports and appearing at hearings. The primary function of a Subchapter V trustee is to assist in the confirmation of a consensual plan but could also involve “mediating” between the creditors and the debtor to get to a payment arrangement in which all parties agree is acceptable. One of the greatest concerns of practitioners is the cost of the Subchapter V trustee. It is unclear, as of the date of this writing, how much the Subchapter V trustee can charge the debtor to comply with the statutory duties. Nor, is there any guidance in how much the trustee should be involved in the debtor’s business activities. If Subchapter V trustees are too involved or incur a large fee, it could render the confirmation of a plan unfeasible. At the time of the filing of the case, the debtor and its counsel should have a plan of action and be prepared to move quickly. Soon after the filing date, financial statements and tax returns must be filed. The debtor and counsel must then appear within 10 days for an initial debtor interview with the U.S. Trustee. This interview is an informal discussion of the duties of the debtor while in bankruptcy. Certain documents are generally required before or shortly after this meeting, including bank statements, tax returns, licenses, projections, and proof of insurance. The bankruptcy court must hold a status conference within 60 days of the filing. At the status conference, the debtor’s counsel, along with the Subchapter V trustee, will report to the court the business of the debtor and what steps the debtor has taken or will take to attempt to propose a consensual plan. A plan must be filed within 90 days of the filing of the case. Unlike a regular Chapter 11, a disclosure statement is not required and does not need to be approved. The plan, however, must include much of the information that would normally be in a disclosure statement, such as providing information about the history of the debtor, what led to bankruptcy, how the debtor will reorganize, and why the plan is feasible. The plan must also provide a liquidation analysis. The relative ease of confirming a plan of reorganization is what makes the Subchapter V option the most appealing to debtors. Although the code provision urges consensual plans, Subchapter V allows the debtor to confirm the plan without getting any creditors to vote in favor of the plan. As long as the plan treatment is fair and equitable and the debtor is allocating all of its disposable income to the repayment of creditors, the Court can confirm the plan. The payments must be for a period of not less than three years and not more than five years. For individuals utilizing Subchapter V there is another advantage. If the individual has a debt secured by their home and the debt was incurred for business purposes, the debtor may strip off the unsecured portion of that debt. This will mostly arise when an individual obtained a Small Business Administration which required the home to be included as collateral. PBCBA BAR BULLETIN 9 If the plan is consensual, the debtor will be in charge of distributing the funds to the creditors. If it is not consensual, the Subchapter V trustee will make the distributions. The Subchapter V trustee will be able to charge a small percentage of the amount being distributed. The percentage will likely be in line with the amount chapter 13 trustees charge for distribution, typically around 5%. Determining whether to use Subchapter V or a regular Chapter 11 is a strategic decision that must be made before filing the case. The debtor must consider the extra cost of a subchapter V trustee versus the ability to confirm a Chapter 11 plan. If a debtor believes it can get a plan confirmed with a regular Chapter 11, then Chapter 11 may be a better choice. Where debtors have “unfriendly” creditors that can control a class vote, Subchapter V would be preferred to regular Chapter 11 because of the ability to confirm a plan without a single vote in favor of the plan. Subchapter V appears to be a good choice for certain debtors. The devil is, of course, always in the details, so debtors will have to weigh their choices and choose the option that works best for them. Brian McMahon is a bankruptcy attorney practicing in Palm Beach and Broward Counties with his primary office located in West Palm Beach, FL. Mr. McMahon represents individuals and corporations in all aspects of bankruptcy.