What Are the Basic Tests of Eligibility for Subchapter V Reorganization?
Subchapter V of the U.S. Bankruptcy Code represents a streamlined, more cost-effective option for small business debtors seeking protection from creditors while reorganizing debt. Introduced as part of the Small Business Reorganization Act of 2019, it simplified the reorganization process with the intent of reducing the complexities and expenses typically associated with Chapter 11 filings.
However, eligibility for Subchapter V is subject to specific tests designed to limit this type of relief to genuine small business debtors.
First, the debtor must be engaged in “commercial or business activity.” Courts interpret this requirement broadly, encompassing almost any activity conducted with a profit motive, excluding purely personal or consumer transactions. This definition aims to cover a wide range of business operations, reflecting the intent of the law to support small to medium-sized business entities.
Second, a debtor’s noncontingent, liquidated debts — both secured and unsecured — must be no more than $7,500,000. This total includes the debts of affiliate debtors, though it excludes debts incurred between affiliates. The inclusion of affiliate debts is so that the aggregate fiscal health of related entities is considered, preventing larger conglomerates from fragmenting liabilities among various subsidiaries in order to fall under the eligibility threshold.
Third, not less than 50 percent of the enterprise’s debts must arise from commercial or business activities. This requirement ties the debt directly to the operational aspects of the business, excluding debt primarily accumulated through personal or non-business activities. This stipulation is designed to restrict Subchapter V’s protections to those businesses where the majority of debt accumulation stems from genuine business operations.
In view of these stringent criteria, it is essential for potential debtors to conduct a thorough analysis of their eligibility before filing a Subchapter V petition. This includes a careful review of the nature and the extent of their debts. Additionally, it is important to draft a proposed plan of reorganization supported by realistic financial projections. These projections must demonstrate the feasibility of the plan, showing that the business can continue operations post-reorganization without defaulting on its obligations or needing additional bankruptcy relief. A well-prepared debtor is more likely to persuade the court of their ability to successfully reorganize.
The Subchapter V process, though not as complicated as a full Chapter 11, can be challenging nonetheless. The Law Offices of Michael Jay Berger in Beverly Hills helps small businesses dealing with excessive debt obtain the benefits of bankruptcy protection and reorganization. Call 310-271-6223 or contact us online to schedule a free initial consultation.
