Subchapter V vs. Traditional Chapter 11: Faster, Cost-Effective, Flexible Path to Debt Restructuring
Financial restructuring can be an arduous process for an overleveraged business. However, the Small Business Reorganization Act (SBRA) that took effect in February 2020 introduced a streamlined path for small and middle market businesses seeking a quicker and more affordable path to recovery. This article delves into the key differences between Subchapter V and traditional Chapter 11 bankruptcy, highlighting how Subchapter V offers a faster, less expensive, and more flexible approach.
1. Streamlined Process and Expedited Relief
One of the most significant advantages of Subchapter V is the speed at which businesses can reorganize and emerge from the process. Traditional Chapter 11 proceedings can be complex and lengthy, with numerous procedural hurdles that can drag on for months or even years. Subchapter V, on the other hand, is designed to expedite the reorganization process significantly, allowing businesses to propose and confirm a plan of reorganization in as little as 8 weeks.
2. Reduced Costs and Enhanced Accessibility
Traditional Chapter 11 restructurings have historically been notorious for their high costs, making them particularly challenging for small businesses with limited financial resources. The expenses associated with attorney fees, court proceedings, and creditor negotiations can quickly add up, placing an additional burden on struggling businesses. In contrast, Subchapter V levels the playing field by providing a more affordable debt restructuring option tailored to the needs of smaller enterprises. By reducing procedural requirements and legal complexities, the cost of reorganizing is significantly mitigated, offering greater accessibility to financially distressed businesses.
3. No Absolute Priority Rule
One of the most notable distinctions between Subchapter V and traditional Chapter 11 bankruptcy is the absence of the absolute priority rule within Subchapter V. The absolute priority rule, a cornerstone of traditional Chapter 11, dictates that in order for a reorganization plan to be confirmed, all senior creditors must be paid in full before any junior creditors or equity holders can retain any interest in the reorganized business.
This rule often led to disputes and hindered the confirmation of reorganization plans, especially in cases involving small businesses. Subchapter V eliminates this contentious requirement, enabling business owners to retain equity in the reorganized entity without having to fully pay off existing creditors. This flexibility enhances the chances of confirmation for reorganization plans, generally keeping ownership in tact, and thereby facilitating a smoother path to recovery. In a nutshell, the elimination of the absolute priority rule in Subchapter V cases vs traditional Chapter 11 means that a business can reduce and restructure debt to manageable levels while owners remain in control and keep their ownership.
4. Trustee Involvement and Collaboration
Subchapter V introduces the concept of a new kind of trustee, whose job is to facilitate confirmation of a consensual reorganization plan. This trustee often plays a critical role in assisting communication between the debtor and creditors, which can lead to a more cooperative approach between all parties involved.
5. Other Differences: Subchapter V vs Traditional Chapter 11
There are numerous other differences between Subchapter V and traditional Chapter 11, including no unsecured creditors committee, no requirement for a separate disclosure statement, and the ability for an individual debtor to restructure a (non-purchase money) home mortgage that was used for business purposes. All of these differences lead to a process that is faster, less expensive, and more favorable to smaller businesses that need to right size debt.
Subchapter V represents a game-changing alternative to traditional Chapter 11 bankruptcy, particularly for smaller businesses grappling with financial difficulties. Its streamlined process, reduced costs, and elimination of the absolute priority rule present a more favorable environment for businesses seeking to right-size debt. By prioritizing speed, cost-effectiveness, and flexibility, Subchapter V has emerged as a powerful tool for struggling businesses to swiftly reorganize, rebuild, and chart a course towards a brighter financial future. However, as bankruptcy laws change over time, consulting with experienced legal professionals remains vital for navigating this complex area of law effectively.
About EmergeLaw, PLC
EmergeLaw is a boutique law firm that represents small and middle market businesses and their owners in debt workouts, Chapter 11 reorganizations, Subchapter V restructurings, and other proceedings to help them deleverage and reposition for future success. Applying decades of experience and a specialized toolkit, our Nashville insolvency attorneys help entrepreneurs, family businesses, private equity funded companies, and real estate investors maximize value in ways that many clients find unexpectedly advantageous and efficient.