Sean Kulka authored an article for the October 2022 issue of Bankruptcy Strategist detailing Subchapter V of Chapter 11 of the Bankruptcy Code, including details of the substantive and procedural changes intended to streamline the process for small business debtors. These changes include eliminating certain requirements that made it more difficult and expensive for small businesses to reorganize. For those who qualify, Subchapter V is now an advantageous way to reorganize a business.
Congress enacted the Small Business Reorganization Act of 2019 (“SBRA”), which became effective on February 19, 2020, and created Subchapter V.
“To be eligible for Subchapter V, a debtor must: 1) meet the definition of a ‘small business debtor’; and 2) elect to be treated as a debtor under Subchapter V,” Sean explained. “Prior to the COVID-19 pandemic, the Bankruptcy Code defined a small business debtor as a business ‘engaged in commercial or business activities . . . that has aggregate noncontingent liquidated secured and unsecured debts . . . in an amount not more than $2,725,625 (excluding debts owed to one or more affiliates or insiders) not less than 50% of which arose from the commercial or business activities of the debtor.’”
In light of the pandemic, Congress temporarily increased the debt limit to $7.5 million, which has been extended past the original March 2021 expiration date multiple times and now is set to expire in June 2024.
“Accordingly, until at least June 2024, Subchapter V will remain a viable option for a much larger pool of small and mid-sized businesses to reorganize,” Sean said.
In addition to highlighting the increased opportunity for businesses to leverage this powerful tool to reorganize, Sean also detailed takeaways from a June 2022 ruling on Subchapter V eligibility in National Small Business Alliance, Inc., including some potential unintended consequences.
“Recalcitrant creditors may seek to utilize National Small Business Alliance as a sword rather than a shield, and pursue the revocation of otherwise lawful Subchapter V elections in order to leverage the more strenuous economic requirements of a traditional Chapter 11 proceeding,” he said. “But Subchapter V debtors can and should argue that National Small Business Alliance is limited to the facts of the case — material delays in the confirmation process in the context of the dispossession of management. Further, debtors should view National Small Business Alliance as a friendly reminder that although Subchapter V may create a clearer path to confirmation, they must be aware of, and (absent an extension by the court) comply with, the more stringent timing requirements, such as the requirement of filing a plan within 90 days after filing bankruptcy.”
To read the full article, please click here.