What Is 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 creditors
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. Also,
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 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
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.
Subchapter V is generally a faster, more efficient bankruptcy process.
A plan of reorganization must be filed with the bankruptcy court within
90 days of the commencement of the proceeding. However, the bankruptcy
court may extend this deadline under special circumstances a debtor should
not be held accountable (e.g., COVID-19).
In addition, certain documents like disclosure statements do not need to
be drafted as they would in a traditional Chapter 11 bankruptcy.
Subchapter V restructurings are similar to Chapter 11 bankruptcies in that
businesses or individuals with primarily business debt have the option
Selling off assets to reduce debts
Funding a reorganization plan with future income
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 from creditors.
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 discourage 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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