Subchapter V: A Small Business Lifeline Just In Time

This article was originally published in Forbes. Click here to see the original article

Though bankruptcy is a complex process, the concept is simple. If your business income — or your personal income, if you’re contemplating a personal bankruptcy — isn’t enough to meet your debt obligations, you’re probably “bankrupt,” at least insofar as you’re eligible to declare bankruptcy.

Of course, being bankrupt doesn’t mean you have to declare bankruptcy. You might choose to sell certain assets and use the proceeds to stay current on your debts, or you might renegotiate with your creditors so you can make lower payments without the need to file in bankruptcy court

But if those aren’t options for you, then bankruptcy is.

Chapter 7 bankruptcy, a form of liquidation bankruptcy, is the most common and, in many ways, the most straightforward. Your assets (except for certain protected assets) are sold off, and the proceeds are split up among your creditors however the court deems fit.

Chapter 11 and 13 bankruptcies are forms of reorganization bankruptcies, where you keep most or all of your assets and get the court’s help in negotiating with creditors (as in, the court can force creditors to accept a deal). Businesses can keep operating, with their debts reduced and/or paid back over longer periods of time

Obviously, if you want to keep your business going, you’ll need to go the Chapter 11 or 13 route. But Chapter 13 has strict eligibility requirements and can involve more court control over your finances, and until recently, Chapter 11 was prohibitively complex and expensive for most small businesses (and most individuals).

Then came Subchapter V.

The Small Business Reorganization Ac

In August of last year, a small piece of legislation became law without any fanfare or attention outside the bankruptcy world. It took effect this past February, just before small businesses were hit by the pandemic-induced financial free fall. While this little law still hasn’t been a headline-grabber, its importance grew exponentially overnight.

All the Small Business Reorganization Act did was add a bit of text to Chapter 11 of the Bankruptcy Code. Subchapter V added a simplified version of Chapter 11 bankruptcy for entities (businesses and individuals) whose debts don’t exceed a certain threshold. Developing and getting approval for a repayment plan are much faster processes, and while there’s still court oversight, it may be less intrusive than a standard Chapter 11 proceeding.

Long story short, small businesses can now afford to reorganize under a Chapter 11 bankruptcy.

This is a huge deal. Before, a small business or individual with a significant income hit (pandemic, anyone?) would likely run into trouble meeting the eligibility requirements for a Chapter 13 bankruptcy, even under the relaxed guidelines set by the CARES Act. And those guidelines are due to expire soon, anyway. The only other alternative was a Chapter 7 bankruptcy, and that meant liquidating assets and closing up shop for good.

Subchapter V isn’t Covid-19-related legislation— remember, it became law last August — and it’s here to stay. The eligible debt threshold was recently increased as part of the pandemic response, giving even more small businesses the option to use the simplified Subchapter V process, and many in the small business community had been clamoring for a higher threshold before the law was even passed. It’s entirely possible, perhaps even likely, that the higher threshold will become a permanent feature.

What It Means For You

If you own a small business, or if you’re unable to meet your personal financial obligations, you may be able to go through a simplified bankruptcy process that allows you to keep most or all of your assets. For a business, this means you get to continue operating even after bankruptcy, just like large corporations have done under Chapter 11 for decades.

It’s a lifeline that allows you to weather a storm more easily, without selling your ship for timber. And with calmer seas on the horizon, that’s a good thing to have around.

The information provided here is not legal advice and does not purport to be a substitute for the advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.