What Is A Subchapter V Bankruptcy?
In February 2020, just before the COVID-19 pandemic began, Congress passed the Small Business Reorganization Act (SBRA). The SBRA created a new type of chapter 11 reorganization bankruptcy for small businesses. The applicable provisions are in Subchapter V of Chapter 11 of the Bankruptcy Code found at 11 U.S.C §§1181 – 1195. To be eligible, the individual or entity must be engaged in commercial or business activities, excluding single asset real estate, and have non-contingent, liquidated debts totaling less than $7,500,000. Not less than 50% of the total debt must arise from the commercial or business activities of the debtor (which can be relevant in an individual case). To date, the eligibility requirements have been broadly construed to cover various debtors, including individuals with rental properties, non-profit organizations, businesses in the process of liquidating, homeowner or condominium associations, and various small businesses that we visit every day.
In a Subchapter V case, the debtor remains in possession and control of its assets and business through existing management under the supervision of the bankruptcy court as in a regular chapter 11 reorganization. However, in a Subchapter V case, a Subchapter V Trustee is appointed to assist the debtor in keeping its reorganization on track and to assist the parties in resolving disputes in the case with the goal of achieving a consensual plan of reorganization (akin to a mediator). The panel of Subchapter V Trustees is generally composed of experienced bankruptcy attorneys and workout consultants/CPAs. The Subchapter V Trustee is paid by the debtor as a cost of administration in the case and his or her fees are approved by the court.
Subchapter V was designed to simplify the reorganization process and lessen the burden and expense of reorganization under chapter 11 for small businesses. In Subchapter V, the debtor must file a plan within 90 days and cases typically last about six months. While creditors have the opportunity to vote on the plan of reorganization, the debtor is not required to obtain the vote of any class of creditors. This is a major change from regular chapter 11. Notwithstanding the vote, the bankruptcy court will confirm the plan if it is “fair and equitable” to the creditors. For a secured creditor, that means that the plan provides a stream of payments at a reasonable interest rate over a reasonable period of time (just like in regular chapter 11). For an unsecured creditor, that means that the plan pledges the debtor’s net disposable income to the payments under the plan (like in an individual chapter 13 repayment case). In many Subchapter V cases, the percentage payout to unsecured creditors is very small. Confirmation hearings in Subchapter V cases tend to be short and sweet if the Subchapter V Trustee is supporting confirmation of the plan.
Any small business that is in distress should consider filing a reorganization under Subchapter V of Chapter 11. It is a powerful and less expensive alternative.
The author, Michael Markham, is a partner at Johnson Pope Bokor Ruppel & Burns and a 35-year bankruptcy practitioner who recently bought a home in Tallahassee. He is currently on the panel of SubChapter V Trustees in the Middle District of Florida, and is a Florida Supreme Court Certified Circuit Mediator.