Subchapter V was added to Chapter 11 of the U.S. Bankruptcy Code in 2019 to make reorganization bankruptcies more accessible to small businesses. The subchapter went into effect on February 19, 2020. The Chapter 11 Bankruptcy Subchapter V was designed for small businesses with debts less than $2,725,625. Businesses that file under Subchapter V can force creditors to accept court-approved repayment plans over three (3) to five (5) years.
The new subsection was intended to be a faster and less expensive path for small business debtors rather than the burdensome and costly traditional Chapter 11 Bankruptcies. A debtor to be eligible for Subchapter V must be engaged in commercial activity and its total debts, secured and unsecured, must be less than $2,725,625.
The purpose of this new section of the Bankruptcy Code is to allow business debtors and certain individuals to reorganize their obligations under Chapter 11 without the need for obtaining the consent of a class of “impaired” creditors as required under a traditional Chapter 11 Bankruptcy. More importantly Chapter 11 Bankruptcies, Subchapter V, relaxes some of the rules for administration and the payment of United States Trustee quarterly fees. Certain individual debtors may also benefit from the elimination of the so-called “absolute priority rule.” Said rule prevented exemption of real or personal property in some cases and may not be permitted in a Chapter 11, Subchapter V.
Despite the streamline process of the Subchapter V; the Subchapter V still retains the following traditional Chapter 11 burdens:
- a) Monthly operating reports
- b) Special Debtor in Possession bank accounts
- c) An intensive inquiry and appointment of a Chapter 11 Trustee.
The key takeaway for debtors and creditors is that the process is designed to cost less and move much more quickly than traditional Chapter 11 Bankruptcies.