SubChapter V Chapter 11
Small Business and Individual Reorganization
Subchapter V Chapter 11 Reorganization
The Small Business Reorganization Act (SBRA) was officially signed into law by the President in August 2019 and it put into play a different possibility for reorganization for small to medium size businesses. The entire intent behind the law was to streamline the Chapter 11 process to keep fees and costs down.
I am sure you have read all over the internet about the potential costs for a full Chapter 11 reorganization and find the costs a bit unappealing. The SBRA attempts to remove a lot of the cost hurdles. First, there will be no unsecured creditors committee and committee attorney that would costs the business money. Second, there are no quarterly U.S. Trustee fees that will costs the business money. The SBRA also waives a lot of the formality requirements to keep the costs down, like the need for a Disclosure Statement. The intent is to also speed up the proceeding to keep fees and costs down.
Our office takes pride in keeping non-Subchapter V bankruptcy case fees and costs as low as possible. We were even featured in a Wall Street Journal article titled The $12,473 Corporate Reorganization that ran in April 2015 to show that Chapter 11 proceeding can be successful and affordable. Given our ability to be successful in regular small business Chapter 11 proceedings while also keeping them affordable I only recommend making the Subchapter V election in a few very specific scenarios.
The first scenario where a Subchapter V makes sense is where an individual has taken out a loan, usually an SBA loan, and as additional collateral they have placed a mortgage on the individuals homestead property. Under Subchapter V, a mortgage on a homestead that was taken out for business purposes and not to purchase the property can be modified and in certain circumstances entirely removed. This is not the case in a typical Chapter 11 proceeding.
The second scenario where a Subchapter V makes sense is where there is one monster-mega creditor that you know is going to refuse to agree to anything proposed, reasonable or not. In a Subchapter V proceeding there is no voting and thus you can still get a Chapter 11 Plan of Reorganization approved without the monster-mega creditors approval and vote. Again, this is not the case in a standard Chapter 11 proceeding.
In order to even consider a Subchapter V proceeding the business or individual must normally have debts under $2,725,625 in total liquidated debts. This includes secured and unsecured debts of all kinds. Under the CARES Act this debt limit has been raised to $7,500,000 for one year from the date of enactment of the CARES Act. After the one year, the limit goes back down to $2,725,625. For an individual to qualify their debts also have to be at least 50% commercial or business related. There are also a few types of businesses excluded from making the Subchapter V election, like Single Asset Real Estate ventures.
If you are considering a Chapter 11 proceeding and feel as though a Subchapter V election may makes sense, please feel free to call and discuss your options. There is no reason to wait until it is too late.