Deciding to file for business bankruptcy is never straightforward. However, it's reassuring to know that there are ways to make the process less daunting and more cost-effective for small businesses. In this blog post, we'll delve into what's new with Subchapter 5 bankruptcy, a tailored bankruptcy solution designed specifically for small businesses.
Let's take a look at what Subchapter 5 bankruptcy is, which businesses are eligible, and what benefits it can provide a business struggling with overwhelming debt.
What is a Subchapter 5 Bankruptcy?
A Subchapter 5 Bankruptcy is a specialized form of bankruptcy under Chapter 11 of the U.S. Bankruptcy Code, commonly referred to as a “reorganization” bankruptcy. Introduced in 2020, Subchapter 5 was specifically designed to simplify and streamline the reorganization process for small businesses, making it a more affordable and attainable option. This relatively new provision offers a vital lifeline for small business owners aiming to restructure their debt without halting operations.
Under Subchapter 5 bankruptcy, small business owners can reorganize debt and develop a plan to pay off remaining debt, without shutting down business operations. One of the most commonly referred to features of a Subchapter 5 bankruptcy is the ability of the business owner to use the plan to shed unsecured debt.
What's the Difference Between Subchapter 5 and Regular Chapter 11 Bankruptcies?
The primary distinction between a conventional Chapter 11 bankruptcy and a Subchapter 5 bankruptcy lies in their complexity and the level of control afforded to the business owner.
A Subchapter 5 bankruptcy is designed to be more efficient, quicker, and significantly less costly than a standard Chapter 11 bankruptcy. What sets Subchapter 5 apart is that it empowers business owners by allowing them to retain their equity, maintain operational control, and exclusively propose the debt restructuring plan, ensuring they remain at the helm of their business's financial recovery.
How Does a Texas Business Qualify for Subchapter 5 Business Bankruptcy?
Here's what new, unfortunately, Congress failed to re-increase the non-contingent, liquidated debt limit cap, resulting in the ceiling being lowered from $7,500,000 down to inflation adjusted $3,024,725 as of June 2024.
To qualify for a subchapter 5 business bankruptcy, your business must:
- Be actively pursuing business activities
- Have 50% of your business debt coming from business activities
- Have non-contingent, liquidated debt of no more than $3,024,725.
So, if your business doesn't appear to qualify, it may be worth talking to a Texas business bankruptcy attorney to calculate your debt and consider your options.
What Are the Benefits of a Subchapter 5 Bankruptcy?
Subchapter 5 bankruptcy was added to Chapter 11 of the U.S. Bankruptcy Code with the sole purpose of supporting small businesses by keeping them operational and providing owners with the necessary relief to regain profitability.
- Continued business operations: Known collectively as the “reorganization” bankruptcy, Chapter 11 in all its forms enables a business to continue its operations while crafting a debt restructuring and repayment strategy aimed at restoring profitability.
- Quicker bankruptcy process: Subchapter 5 business bankruptcy aims to offer a more accessible pathway back to profitability for smaller businesses. By minimizing reporting requirements and limiting the chances for creditors to interfere, Subchapter 5 streamlines the process, making it significantly faster and more affordable compared to a traditional Chapter 11 bankruptcy.
- 3-5 year business debt repayment plan: Subchapter 5 business bankruptcy allows a small business to spread debt repayment over 3–5 years, a much lengthier repayment timeline than many other business bankruptcy options.
- Only a business owner may put forth a reorganization plan: Under a traditional Chapter 11 bankruptcy, creditors have the right to propose their own reorganization plan if they disagree with the one submitted by the business. In contrast, Subchapter 5 grants the exclusive right to the business owner to draft and submit the reorganization plan, ensuring that the final strategy aligns with their vision and is tailored to the unique needs of their business.
- The bankruptcy court can confirm a business reorganization plan without creditor approval: Under a traditional Chapter 11 bankruptcy, creditors have the power to approve or reject a business’s reorganization plan. However, Subchapter 5 shifts the balance of power, granting the court the authority to confirm the plan even without creditor approval. This pivotal feature accelerates the process and significantly increases the likelihood that a small business will secure a favorable reorganization plan.
- No required disclosure statement: In other bankruptcy cases, it's often required that the business owner file a detailed disclosure statement with the court that is designed to illustrate how your business functions and whether you can repay your creditors. While this is useful to the court, it can affect the privacy of your business. In a Subchapter 5 case, no such disclosure statement is required.
- Pay back administrative expenses in installments: Traditional Chapter 11 bankruptcy cases require that a business immediately pay back all administration expenses once your reorganization plan is approved and becomes effective. Conversely, Subchapter 5 offers a more flexible approach, as your business is allowed to spread those payments out across the term of its repayment period.
Although Subchapter 5 bankruptcy is a relatively new addition to the bankruptcy code, it has proven to be a highly effective and cost-efficient means of relieving burdensome debt and restoring a struggling business to profitability.
If you believe that a Subchapter 5 business restructuring bankruptcy could be the lifeline your business needs, or if you are seeking strategies to navigate and manage your business's debt more effectively, our attorneys are ready to assist you.
For more information or guidance from experienced business bankruptcy attorneys, talk to The Lane Law Firm today.
