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Meeting the Subchapter V Test of Being “Engaged in Commercial or Business Activities”

The Small Business Reorganization Act (SBRA), enacted in 2020, created a new procedure called Subchapter V, which made it easier for small businesses to file for Chapter 11 protection. Since then, Subchapter V has been used extensively to help business owners regroup, reorganize and return to solvency when they otherwise would have gone under. However, this remedy has strict eligibility requirements, including that the debtor be “engaged in commercial or business activities.” There is a growing body of case law attempting to define this phrase and how a bankruptcy filer can prove they meet the definition.

When enacting Subchapter V, Congress stated that the goal was to allow small business debtors to remain in business and continue benefitting their owners, employees and customers. To be eligible for Subchapter V, a debtor must be a person who:

  1. Is engaged in commercial or business activities
  2. Has aggregate debts of no more than $7.5 million (this debt limit applies through March 27, 2024)
  3. Has 50 percent or more of their debt arising from commercial or business activities
  4. Is not engaged in the business of owning single-asset real estate as their primary business

If a debtor business is actively operating at the time of filing, then it qualifies as being engaged in commercial or business activities. But if the business is no longer operating on the date of filing, then eligibility is more complicated. Most bankruptcy courts, including those in California, have held that a debtor that has gone out of business at the time of filing can still qualify for Subchapter V as long as they are presently engaged in some type of commercial or business activities.

Whether or not a debtor is actually engaged depends on the totality of the circumstances. Examples of activities that are sufficient to show that the debtor engaged in commercial or business activities include:

  • Actively helping to wind down the affairs of the company
  • Dealing with the sale or other disposition of the business’s assets
  • Working with the company’s creditors
  • Filing tax returns and paying taxes

The totality-of-the-circumstances test makes it possible for debtors to use Subchapter V even if they have gone out of business prior to filing. However, applying the test can have inconsistent results. A qualified Subchapter V attorney should be consulted to make sure you can qualify.

The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s leading bankruptcy firms. If you have questions about whether you may be eligible for Subchapter V relief, please call our lawyers at {PHONE] or contact us online to schedule a free initial consultation.

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