It’s a Subchapter V Bankruptcy World
The Small Business Reorganization Act of 2019 (SBRA) provided a transformative reorganization tool for businesses with total debts of less than $7,500,000. The SBRA, also known as Subchapter V, is a strategic, fast, and cost-effective process for deleveraging a business. With over 3,000 Subchapter V cases filed since the law went into effect in 2020, it has quickly become the preferred form of Chapter 11.
These are uncertain economic times with inflation and interest rates rising and supply chains crimped. At the same time, creditors have become more aggressive after the standstill forced by COVID-19 laws. As collection, foreclosure, and eviction moratoriums expire, and lenders and landlords turn up the heat, the value of Subchapter V as a restructuring tool will only increase. Here’s what small businesses need to know about Subchapter V.
What is Subchapter V?
Subchapter V is a streamlined Chapter 11 process for small businesses. It makes reorganizing or winding down more efficient by providing the following:
Less Cost (1) no U.S. Trustee Quarterly fees; (2) no creditor’s committee (as a general rule); (3) no separate Disclosure Statement required; (4) the ability to pay administrative expenses over the life of a non-consensual plan; and (5) less time between filing of the case and confirming a plan.
Moves Very Quickly Some of the changes that have increased the speed include: (1) only the debtor can file a Plan; (2) the time limits are shortened; (3) no separate Disclosure Statement is required; (4) a Subchapter V Trustee is appointed to “facilitate the development of a consensual plan of reorganization;” and (5) the debtor may confirm a cramdown plan without the acceptance of any class of creditors.
Advantages for Businesses and Owners (1) elimination of the absolute priority rule; (2) certain modifications to home mortgages; (3) the allowance of post-confirmation modifications in some instances; (4) the allowance of a discharge; and (5) other more specific benefits.
With over 3,000 Subchapter V cases filed since Subchapter V’s inception in 2019, SubV filings continue to increase. According to Epiq, Subchapter V filings increased more than 21% in the past year. In its first year, Subchapter V accounted for almost 35% of all Chapter 11 filings, and this year that number is predicted to be well over 50% (excluding related debtors in larger Chapter 11 cases).
Furthermore, and perhaps even more importantly for struggling businesses, the confirmation success rate for SubV Chapter 11s has been more than 6 times higher than other small business Chapter 11 cases in the same period that were not SubV cases. (See https://turnaround.org/jcr/2021/04/subchapter-v%E2%80%99s-first-year-review).
The Sunrise and Sunset of Expanded Debt Limits
Initially, the debt limit for SubV cases was only $2.7 million and limited the use of SubV only to very small businesses. In response to COVID’s economic shutdown, Congress passed the CARES Act which raised the debt limit to $7.5 million, but only until March of 2022.
Congress recognized the need for, and success of, the pandemic-era raising of the SubV debt limit and passed the Bankruptcy Threshold Adjustment and Technical Corrections Act (“BTATC”) which extends the debt limit for eligible businesses to $7.5 million for until 2025. Given SubV’s value and popularity as a small business restructuring tool, it is likely there will be a push to make the increased debt limit permanent.
Eligibility has been one of the most litigated Subchapter V issues. Congress, recognizing SubV’s importance in the struggling economy, addressed in the BTATC an arguable drafting error found in 11 U.S.C. § 1182(B)(iii) defining “affiliate.” When a bankruptcy court interpreted “affiliate” in In re Phenomenon Mktg. & Entm't, LLC, 2022 WL 3042141, at *1 (Bankr. C.D. Cal. Aug. 1, 2022) in a way that would have made a large number of businesses ineligible for SubV relief, Congress amended that provision so many closely held corporations and limited liability companies would not be automatically disqualified.
The Takeaway for a Struggling Small Business
Simply put, Subchapter V is an extraordinary tool for smaller companies in need of reorganizing. Whether the issue is overleverage, cash flow problems, or just needing a “reset,” Subchapter V’s speed, lower costs, and significant advantages make it the vehicle of choice for businesses that qualify.
Nancy King represents debtors, committees, creditors, and asset buyers in Chapter 11 cases and out of court workouts. Prior to becoming a partner with EmergeLaw, PLLC, she served for 25 years as a career judicial law clerk to the Honorable George C. Paine, II (retired) and the Honorable Randal S. Mashburn. She has extensive experience in all aspects of Chapter 11 cases, business bankruptcies, and the practice of law in the U.S. Bankruptcy Court for the Middle District of Tennessee.