The new Subchapter V of Chapter 11 of legislation known as the Small Business Reorganization Act of 2019 became effective on February 19, 2020. Shortly after the act was passed, the COVID-19 pandemic began to impact the country. In recognition of the pandemic, the Coronavirus Aid Relief and Economic Security (CARES) Act was passed on March 27, 2020. The CARES Act has increased debt limits for small businesses pursuing relief under Subchapter V. If you are a small business wner, consider the following options available to you for taking control of your business debt.
Who Qualifies as a Small Business Debtor?
The Bankruptcy Code defines a “small business debtor” as a person or any member of a group of affiliated debtors engaged in commercial activities that has aggregate noncontingent liquidated secured and unsecured debts of not more than $7,500,000. This amount excludes debts owed to one or more affiliates or insiders.
Before the Small Business Relief Act, a small business debtor included debtors engaged in commercial business activities with an aggregate noncontingent liquidated debt of not more than $2,725,625.
Some of the reasons why businesses end up pursuing debt relief under the Small Business Relief Act include:
The Nature of Subchapter V
A trustee is appointed under Subchapter V and will have the duty of facilitating a debtor’s plan. This means that the trustee will appear at hearings about asset sales and other matters. Trustees receive compensation from a debtor and are terminated after a plan is “substantially consummated.”
Subchapter V plans that are filed by small business debtors should include several critical elements like a history of the debtor’s business operations, liquidation analysis, and projections addressing a debtor’s ability to make payments under the plan.
Another other critical issue involved with Subchapter V plans is that administrative expense claims must be paid throughout the term of a plan rather than on confirmation.
The Role of Subchapter V Plans
Subchapter V of the Small Business Reorganization Act allows small business debtors to obtain a discharge on the effective date of plan provided that the plan was consensual and approved under section 1119 (a), which requires compliance with all consensual confirmation provisions in a chapter 11 case.
While they share some similarities, some substantial differences exist between a Subchapter V plan and a traditional Chapter 11 plan. These differences include:
Reasons to Think Twice About Chapter V
Subchapter V plans have several attractive features, but also some notable setbacks which include:
Pursuing Chapter 7 Bankruptcy
Rather than pursue Subchapter V or Chapter 11, debtors also have the option of liquidating assets under Chapter 7. The liquidated assets are then used to pay as much of the debtor’s creditors as possible. Some of the critical issues to appreciate about Chapter 7 bankruptcy include:
Contact a Knowledgeable California Bankruptcy Lawyer
Bankruptcy is a complex process, but a skilled attorney can help to navigate the process. Contact attorney Melanie Tavare to schedule a free case evaluation.
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