How the CARES Act Expands the Reach of Small Business Bankruptcy Protection
In February 2020 the Small Business Reorganization Act went into effect, creating a low-cost, streamlined procedure, known as Subchapter V, for small businesses seeking bankruptcy protection from creditors. No sooner had the law gone into effect than the COVID-19 virus hit the U.S., with a resulting economic recession that put thousands of businesses across the country in danger of failing.
In response, Congress included in the Coronavirus Aid, Relief and Economic Security Act (CARES) a provision that makes it possible for more businesses to benefit from Subchapter V. The debt-eligibility threshold — originally $2.7 million — has been raised temporarily to $7.5 million. Businesses with less than that amount of debt can file for this relief until March 27, 2021.
Subchapter V is a simplified form of Chapter 11 bankruptcy, in which the debtor continues its business operations and restructures its debt under a court-approved plan. Chapter 11 can be expensive and time consuming for small businesses. In some cases, a creditors committee can be appointed and hire its own counsel to be paid by the bankruptcy estate. This committee may take an active role in the Chapter 11 and can lodge objections to the repayment plan. Chapter 11 involves sizable administrative expenses and requires the debtor to pay quarterly fees to the Office of the United States Trustee. Small businesses facing insolvency that are not able to afford Chapter 11 have sometimes opted for Chapter 7 bankruptcy instead or have simply closed their doors and gone out of business forever.
Subchapter V provides an alternative that in some ways is similar to Chapter 13 debt restructuring for individuals. Qualifying businesses can retain control of their operations while paying off part of their unsecured debts over a three- to five-year period. In contrast to a straight Chapter 11, only the debtor can propose a debt reorganization plan. No disclosure statement is required. There is no requirement that a class of creditors consent to the plan. A plan can be confirmed without the debtor putting in new value. A creditors committee will not be formed except for cause, such as when there are allegations of mismanagement. A trustee is appointed but plays only a general supervisory role and assists in mediating disputed between the debtor and its creditors. The administrative costs of the Subchapter V case are less than in a regular Chapter 11, and can be paid off over the life of the plan. The debtor does not have to pay quarterly fees. After the plan is completed, the remaining unsecured debts of the business are discharged.
By lowering costs and simplifying the reorganization process, Subchapter V provides an attractive option for small businesses to stay in operation and get back to financial health. The CARES act makes this remedy available to more businesses by temporarily tripling the debt ceiling for eligibility to $7.5 million. However, at least half of that debt must derive from business and commercial activity.
In any bankruptcy Chapter 11 bankruptcy filing, it is essential that you have intelligent, experienced bankruptcy counsel. Although Subchapter V is new, we already have experience filing Subchapter V cases. On August 25, 2020 we filed 2 new Subchapter V Chapter 11 cases, In re Citco Enterprises Inc., Case No. 9:20-bk-11039-MB and In re Nuance Energy Group, Inc., Case No. 2:20-bk-17761-VZ. On October 7, 2020, we filed In re Real Estate Recovery Mission, Case No. 2:20-bk-19314-VZ.
If Subchapter V is an option that you would like to explore in order to keep your business afloat, the Law Offices of Michael Jay Berger can help you. Sofya Davtyan and Michael Jay Berger are both Certified Specialists in Bankruptcy Law, and our initial consultation with you is always free. The decision to file Chapter 11 and the decision to file a Subchapter V Chapter 11 vs. a regular Chapter 11 is complex. Why not get our expert legal advice for free? Our Beverly Hills lawyers have decades of experience helping clients successfully navigate the bankruptcy process. Schedule a free initial consultation with one of our attorneys by calling 310-271-6223 or contact us online.