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Chapter 11, Subchapter V of the U.S. Bankruptcy Code contains special provisions for a small business bankruptcy process that is more streamlined and less costly than the standard Chapter 11 business bankruptcy process. If a small business or individual business owner meets the eligibility criteria, the owner will be able to remain in possession of the business and continue operations while restructuring, reorganizing, and reducing debt while benefiting from the protection provided by Chapter 11, Subchapter V process.
The Subchapter V process differs significantly from the standard process for Chapter 11 business bankruptcy. In the discussion that follows, our business bankruptcy lawyers at Wernick Law provide a general overview of the process and the differences from the standard Chapter 11 business bankruptcy process.
Certain requirements must be met for a small business or individual business owner to qualify for the Subchapter V small business reorganization process. Foremost among the criteria is a limit on the amount of debt of the business. Currently (in October 2024), to be eligible, a small business must have less than $3,024,725 in secured and unsecured non-contingent debt. At least half the total must come from business debts. Subchapter V is not available for single-asset real estate debtors.
Pending legislation in Congress may eventually restore the debt limit to $7.5 million, which was the threshold before the expiration (sunset) of that limit on June 24, 2024, under the terms of the applicable legislation.
A Subchapter V case follows specific steps to accomplish the reorganization of the business. While the process is more streamlined than a standard Chapter 11, it is still complex and time-consuming, with specific requirements that apply throughout. For a small business owner considering Subchapter V, talking with an experienced small business bankruptcy attorney before undertaking the process is strongly recommended. The discussion provided here is a general overview of the process and does not include detailed instructions on the process.
To begin a Subchapter V bankruptcy, the small business debtor files a petition in the bankruptcy court .. Specific information must be filed with the petition, including financial information, but the filing requirements are not as detailed or cumbersome as in a standard Chapter 11 bankruptcy case.
After filing the petition, the small business becomes a debtor in possession. The owner retains control of the business and its assets and may continue operating during the process. Filing of the bankruptcy petition provides an automatic stay of collections (as in standard Chapter 11 bankruptcy) and temporary protection during the process.
In a Subchapter V case, the court appoints a trustee to oversee the process and facilitate the development of the reorganization plan. The trustee does not control the debtor’s finances or operations, but does have a broad range of functions and authority to review and monitor the business and the debtor’s financial condition. The trustee’s main role is to facilitate consensus among the debtor and its creditors so that a plan of reorganization can be filed by general consent.
The process moves relatively quickly after the petition is filed. Within 60 days of filing, the court holds a status conference. Within 90 days of filing, the debtor must submit a plan for reorganization to the court.
The debtor’s reorganization plan must meet specific requirements for the court to approve it. A plan typically provides a three- to five-year period for repayment of the debts of the business. During the repayment period, the debtor devotes its disposable income to making plan payments, except for resources necessary to continue business operations and to support the debtor.
Unlike a standard Chapter 11 reorganization, creditor approval is not required for a small business reorganization plan, and there is not a creditors’ committee appointed. These are some of the reasonsthat a Subchapter V reorganization is more efficient and less costly than standard Chapter 11. Another reason is that the Absolute Priority Rule does not apply; therefore, a business owner can retain ownership of a business without paying the general unsecured creditors in full and without having to contribute New Value to the business.
If the court approves the reorganization plan, the business owner follows the payment requirements of the plan for the established period. At the conclusion of the process, the business emerges from Subchapter V as a restructured, reorganized business operation with eligible debts discharged and no longer burdening the business and owner.
The Subchapter V process includes numerous other details that expedite the process and make it more efficient, while still protecting creditors’ rights. A small business owner considering Subchapter V as the means for addressing overwhelming debt should talk with a knowledgeable small business bankruptcy attorney about eligibility, other requirements, and the details of the process before determining whether small business bankruptcy is the most suitable choice. Making a fully informed decision without getting help from an experienced lawyer is virtually impossible.
At Wernick Law, we concentrate the majority of our practice on Chapter 11 debtor representation. We welcome Florida businesses wishing to learn more about Subchapter V, Chapter 11 small business reorganization or Chapter 11 reorganization bankruptcy to schedule a consultation by calling 561-961-0922 or using the online contact form.
Based in Boca Raton, Wernick Law serves clients in South Florida (including West Palm Beach, Broward County, and Miami), Southwestern Florida (including Naples and Fort Myers), Tampa, Orlando, Jacksonville, and elsewhere in the state.
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