COVID-19 Complicates Estimation of Future Income for Subchapter V Reorganizations
The Small Business Reorganization Act (SBRA) offers a simpler and more affordable alternative to the traditional Chapter 11 bankruptcy process, which historically has been of little use to modest-sized companies. The SBRA procedure, known as Subchapter V, allows such businesses to create three- to five-year repayment plans based their “projected disposable income.” However, the recession caused by the COVID-19 pandemic has made those projections more difficult.
Ordinarily, projecting disposable income is a straightforward process, involving a lookback at the business’s recent revenues and expenses. But as COVID-19 swept through the nation in early 2020, and state and local economies suffered, many small businesses sought Subchapter V protection. When it came time to project their disposable income, these filers tended to provide estimates that were far lower than their track records would indicate. Some debtors projected that they would earn less than half their pre-COVID income.
Debtors hope to obtain more affordable repayment plans by projecting greatly reduced income. Lower estimated earnings translate into reduced payments to creditors. But the ability of creditors to challenge a debtor’s income projections is limited, because one of the features of Subchapter V is that creditors are not allowed to submit competing projections. The court-appointed trustee is the only party who may do so.
Some Subchapter V debtors’ drastically lower projections may be accurate. COVID-19 will have long-lasting and dramatic effects on the viability of many types of businesses, and at present it is difficult to predict how deep and lasting the recession might be. A debtor’s lower income projections may be beneficial to creditors in certain circumstances, since a successful repayment plan can keep the customer in business.
At least for the foreseeable future, bankruptcy courts will need to determine the fairness of debtors’ income projections on a case-by-case basis. It will be important for Subchapter V filers to have in-depth, honest discussions with their attorneys regarding the impact of COVID-19 on the business, both at the time of filing and into the future. This will allow the attorney and the business owner to provide the court with good faith projections that are likely to meet with the trustee’s and the court’s approval.
If you own a small business dealing with curtailed operations and reduced revenues, Subchapter V reorganization may be a beneficial option. The Law Offices of Michael Jay Berger, based in Beverly Hills, is ready to advise you. To find out more about your debt relief options, please call our experienced bankruptcy lawyers at 310-271-6223 or contact us online.