What Are the Advantages to a Subchapter V Bankruptcy?

When the Small Business Reorganization Act was signed into law in August 2019 and enacted in February 2020, Charity S. Bird, a bankruptcy attorney at law firm Kaplan Johnson Abate & Bird in Louisville, Ky., welcomed Subchapter V, a new Chapter 11 bankruptcy designation, as a useful tool for small businesses. But she assumed it wouldn’t lead to a flood of clients.

“It was better than a regular Chapter 11,” she says, “because you don’t have to pay quarterly fees, you don’t have to get a consensual plan through, your creditors don’t get to torpedo it if they want to. You’re able to propose a plan and the only person that you have to make happy with your plan is your Subchapter V trustee.”

But even when she was interviewed to become a Subchapter V trustee, the official told her: “I imagine you’ll get one of these a year. I mean, nobody is really going to qualify with the debt limits being so low.”

“I thought that was probably true,” she says. At the time, the Subchapter V debt limit was $2.7 million.

Then the COVID-19 pandemic hit. And as part of the CARES Act (Coronavirus Aid, Relief, and Economic Security), signed into law on March 27, 2020, the debt limit for Subchapter V debtors increased to $7.5 million.

“That opened the floodgates,” she says. “In one week alone, I got assigned to three cases.”

So how do you know if a Subchapter V bankruptcy is right for your small business?

First, since Subchapter V is designed to shorten debtors’ time in bankruptcy court, you have to be interested in a swift reorganization of your business. After that, Bird says, assuming a debtor qualifies within the debt limits, “a Subchapter V would be right for most entities.”

Here are some of the advantages of Subchapter V cases, according to Bird:

1. There are no quarterly U.S. trustee fees.
2. There’s no unsecured creditor committee—important because the debtor has to pay for committee counsel and that drives up the bankruptcy fees.
3. No absolute priority rule—meaning equity holders can retain their equity in the company without infusing new capital.
4. A plan can be confirmed without acceptance by creditors, so long as the debtor is contributing its maximum disposable income to the plan for 3-5 years and creditors are treated equitably in the plan.
5. A plan will be consensual (all creditors agree to it) or nonconsensual. If a plan is consensual, the debtor receives its discharge upon confirmation. If the plan is nonconsensual, the debtor receives its discharge upon plan completion of plan payments.

A few stipulations: “The debtor cannot be a single asset real estate company; the debtors, if individuals, must be engaged in business; and the majority of the debts must be from that business,” Bird says.

Also know that the $7.5 million debt limit is scheduled to expire one year from the day the CARES Act was signed into law—so March 27, 2021.

For general information on the bankruptcy code, bankruptcy lawyers, bankruptcy cases, business bankruptcies, the bankruptcy process, bankruptcy filings, Subchapter V of Chapter 11 bankruptcies, and liquidation, see our overview on bankruptcy law.