How Subchapter V Helps Individual Debtors Get Chapter 11 Plans Confirmed
Chapter 11 is used mostly by financially stressed companies seeking protection from creditors while working to pay off debt and return to solvency. This form of bankruptcy relief is also available to qualifying individual debtors, but until recently it was too complex and costly to be feasible for them. However, the Small Business Reorganization Act of 2019 created a new process called Subchapter V, which makes a Chapter 11 much less cumbersome and expensive. To qualify for this relief, the debtor must have unsecured debts no greater than 7.5 million dollars, most of which must be business-related.
Subchapter V removes significant barriers to obtaining court approval of a Chapter 11 repayment plan. First and foremost, there is no “absolute priority rule.” In a normal Chapter 11, unsecured creditors are segregated into several classes in order of priority. The rule provides that equity owners of the business cannot retain their interests if a class of creditors objects to the plan, unless that class is paid in full or the equity owners contribute material new value. This can make it difficult to have the reorganization plan approved by the court, especially in the case of an individual debtor with little or no assets. But in a Subchapter V case, a plan that otherwise meets the statutory criteria may be confirmed despite such an objection.
There are other aspects of Subchapter V that make it attractive to individual debtors, such as:
- No competing creditor plans — In traditional Chapter 11 cases, creditors can propose their own reorganization plans for the debtor to follow. These competing plans are usually against the debtor’s interests and can take time and money to rebut. Only a debtor can propose a plan in a Subchapter V case.
- No unsecured creditors’ committee — Most Chapter 11 cases permit a committee to represent the interests of unsecured creditors. These committees often exert great influence over the bankruptcy proceedings and can interfere with the debtor’s recovery. In a Subchapter V case, a committee will not be appointed unless the trustee or creditors demonstrate good cause.
- Reduced and staggered administrative expenses — Subchapter V debtors are not required to pay quarterly fees to the U.S. Trustee. The lack of a creditors’ committee also lowers administrative costs. In addition, debtors may pay off administrative expenses over the term of the plan.
Another significant advantage of a Subchapter V over a traditional Chapter 11 is that the individual debtor can continue to manage the business with very little oversight or interference by the court-appointed trustee.
The Law Offices of Michael Jay Berger in Beverly Hills is one of the largest bankruptcy practices in the Southern California region, with wide experience handling Chapter 11 reorganizations. Feel free to contact us online or call 310-271-6223 to schedule a consultation.