How a Small Business Can Build a Feasible Subchapter V Plan

Subchapter V bankruptcy is a streamlined form of Chapter 11, designed to give troubled small businesses a faster, more affordable path to reorganize their debts and emerge solvent. Unlike in a traditional Chapter 11, there is no requirement that creditors approve a Subchapter V plan. However, the bankruptcy court must confirm the plan, which it will do only if convinced that the plan is feasible and that the company is not likely to end in another bankruptcy.

For a Subchapter V plan to be feasible, it has to meet the following criteria:

• Realistic financial projections — Revenue estimates should reflect the company’s operating history, existing contracts, market conditions and reasonable projections for growth. The plan must account for payroll, rent, supplies, taxes, insurance, debt payments and all other known operating costs. If the projections depend on a sudden increase in sales or a significant reduction in expenses, the business must explain why those changes are believed to be likely.
• A stable operating model — A bankruptcy filing may reduce the financial pressure a company is under but it cannot fix a business model that keeps losing money. It may be time to close an unprofitable location, discontinue an unsuccessful product line or service, renegotiate contracts or concentrate resources on the company’s strongest revenue sources. The plan should explain how these changes will improve the company’s performance after bankruptcy.
• Sustainable cash flow — A business can appear profitable on paper while still lacking the cash to cover its obligations when they come due. Cash flow projections should account for seasonal changes, delays in customer payments, inventory needs, equipment repairs and variable operating costs. The company may also need to preserve a reasonable cash reserve.
• Credible management strategy — If weak accounting practices, poor oversight or previous management decisions contributed to the company’s financial problems, the business should show how those issues have been addressed. It must also provide clarity about who will monitor and control revenue and expenses, cash flow and changes in projections. 
• Reasonable creditor repayments — The repayment schedule must leave the business with enough working capital to continue daily operations. A plan that leaves too little money for meeting expenses can undermine the entire restructuring.

In sum, a feasible Subchapter V plan is one that demonstrates the business’s stability, management credibility and long-term viability. An experienced small business bankruptcy attorney can help by grounding the plan in accurate numbers, achievable restructuring steps and documented evidence aimed at giving the court confidence that the business can meet its obligations and emerge stronger.

The Law Offices of Michael Jay Berger in Beverly Hills assist small businesses throughout Southern California with successful use of Subchapter V bankruptcy. Schedule a free initial consultation by contacting us online or calling 310-271-6223.