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
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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.