Subchapter V: A Simpler Type of Business Bankruptcy

In the days before the Covid-19 pandemic, a new chapter of bankruptcy was created to make small business bankruptcies faster and cheaper.  This new “Subchapter V” could not have come at a better time. Subchapter V was recently made more generous under the Cares Act, enacted on March 27, 2020.

Who can file a Subchapter V Bankruptcy?

Subchapter V is only available to small business debtors, defined in the Bankruptcy Code as a person or entity engaged in commercial or business activity with total secured and unsecured debts totaling less than $7.5 million (goes down to $2,725,625 in one year). If the business has debts that exceed this amount, it does not qualify for Subchapter V. Another requirement for Subchapter V, is that over half of the debts must come from business activity.

Benefits of Subchapter V?      

First and foremost Subchapter V simplifies business bankruptcy and makes it more certain. Generally, a Subchapter V plan will be approved so long as it provides that all disposable income for three to five years will be used to make plan payments.  Critically, a business owner filing Subchapter V for their business remains in control of the business as a so-called “debtor-in-possession.” Absent fraud or gross incompetence, the Bankruptcy Court or trustee does not interfere with the day-to-day activities and decisions of the small business debtor. Therefore, a business owner filing a Subchapter V bankruptcy can continue to collect a reasonable salary from the business, which is a key way that Subchapter V differs from Chapter 7. 

Second, a business in Subchapter V files a plan with the court to stay open, which must be filed within ninety days of the filing the bankruptcy case. This plan provides the business with a great deal of flexibility. The plan can pay a percentage off of unsecured debts and get discharged from the balances. The plan can help with secured debt – like real estate and vehicle loans – by making up missed payment, reducing balances to the value of collateral, and giving up property in exchange for wiping out a debt. Subchapter V allows business owners to prioritize obligations like wages and salaries over other types of debts. This flexibility to modify secured debts even extends to debts secured by the business owner’s home if the loan was used primarily for business purposes. This means if you borrowed against your home to invest in your small business, Subchapter V may offer you relief. This extremely powerful tool is unique to Subchapter V and is available only to small business debtors.

Subchapter V also create simplicity. It eliminates the cumbersome creditors’ committees required in standard Chapter 11 cases, and it expedites the plan confirmation process. What this means in practical terms for small businesses is that you are spending less time tied up in court and less in attorneys’ fees when you file as a small business debtor under Subchapter V.

Subchapter V cases are also appointed a Subchapter V Trustee, who is responsible for collecting plan payments and facilitating plan confirmation. Although the Subchapter V Trustee is ultimately paid by the small business debtor, this arrangement is likely to save the average small business time and money, in comparison to handling plan payments in-house.

Is a Small Business Bankruptcy Right for Me?

As with any serious legal matter, the answer to that question is “it depends.” Although Subchapter V bankruptcies are simplified compared to a standard Chapter 11 case, you still need to have high-quality legal representation to give yourself the best possible chance at a successful reorganization. If you are a Massachusetts small business owner in debt trouble, you can contact us to request a free consultation.

Case Review