The Small Business Reorganization Act
The Small Business Reorganization Act went into effect on February 19,
2020 and added a new subchapter V to
Chapter 11 designed to make bankruptcy easier for small businesses.
The statute defines eligible small business as “entities with less
than about $2.7 million in debts that also meet other criteria,”
according to the U.S. Department of Justice, and the act:
- imposes shorter deadlines for completing the bankruptcy process;
- allows for greater flexibility in negotiating restructuring plans with
- provides for a private trustee who will work with the small business debtor
and its creditors to facilitate the development of a consensual plan of
Be aware that entities that derive substantially all their income from
operating a single real property are ineligible for Subchapter V.
Note that Subchapter V does not repeal existing Chapter 11 provisions regarding
small business debtors; instead, it creates an alternative procedure that
small business debtors may elect to use. Subchapter V is generally a faster,
more efficient bankruptcy process, as a plan of reorganization in this
process must be filed with the bankruptcy court within 90 days of the
commencement of the proceeding. In addition, certain documents like disclosure
statements do not need to be drafted as they would in a traditional Chapter
Subchapter V restructurings are similar to Chapter 11 bankruptcies in that
businesses or individuals with primarily business debt have the option
of selling off assets to reduce debts, funding a reorganization plan with
future income, or conducting a liquidation of desired assets. The plan
of organization must be feasible and fair, filed in good faith, and in
the best interest of the creditors. Subchapter V businesses also have
the protection of the bankruptcy court and can receive appropriate flexibility
The Payment Plans
Subchapter V allows a debtor to spread its debt over 3 to 5 years, during
which time the debtor must devote its projected disposable income to paying
creditors. Generally, this benefits both debtors and creditors, as it
allows debtors to spread payments over time and allows creditors an available
recovery from debtors who have a realistic expectation of income over
time. In a traditional Chapter 11 case, administrative expenses must be
paid at plan confirmation, but under Subchapter V, they may be paid over
the life of the plan.
As mentioned earlier, in order to keep cases moving quickly (and conserving
a Subchapter V debtor must file its plan of reorganization within 90 days
after entering bankruptcy. However, the bankruptcy court may extend this deadline under special circumstances
a debtor should not be held accountable (e.g., COVID-19).
Regarding the role of the trustee,
under Subchapter V, a trustee is automatically appointed, but the debtor
retains control of its assets and operations. Creditors’ committees are formed only for cause in Subchapter V
cases, in contrast to Chapter 11 cases.
Subchapter V also cushions small business owners from certain personal
consequences that might disincentivize a Chapter 11 filing. For instance,
if the debtor’s principal used their primary residence as security
for a loan to fund the small business, the debtor’s plan may modify
the loan. Additionally, Subchapter V also does not require equity holders
to provide “new value” if they want to retain their equity
interest in the business.
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