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Subchapter V bankruptcy: Helping small businesses in distress

On Behalf of | Mar 26, 2024 | Business Bankruptcy |

Times have been tough over the last few years, especially for small business owners. Supply chain interruptions, staffing issues and cuts in consumer spending due to inflation have made profit margins thinner than ever. 

Many small businesses eventually need to seek bankruptcy protection to navigate their ongoing financial difficulties. Fortunately, the Small Business Reorganization Act of 2019 introduced a game-changing solution tailored specifically to the needs of small businesses: Subchapter V bankruptcy. Here are the basics you should understand about this version of bankruptcy relief:

What is a Subchapter V bankruptcy?

A Subchapter V bankruptcy is a new provision introduced under Chapter 11 of the Bankruptcy Code that offers a streamlined and cost-effective process for small businesses seeking debt relief. 

Its primary objective is to provide struggling small businesses with a viable pathway to restructure their debts and emerge stronger than before – without all the complexities associated with traditional Chapter 11 bankruptcy.

Who can file for Subchapter V bankruptcy protection?

To qualify for a Subchapter V bankruptcy, the business must still be active, not be engaged primarily in owning and operating a single property, and have a total debt load that is $2.75 million or less, and the debts must not be owed to company insiders. At least half of the debt the business seeks to manage must come from actual business operations.

What are the key advantages of a Subchapter V bankruptcy?

The number one advantage of Subchapter V is that a business can propose its own reorganization plan to the bankruptcy trustee and have it approved without any input from its creditors – which is unlike the process for a traditional Chapter 11. In addition, the business need not provide the same sort of extensive disclosures that businesses normally need to submit for Chapter 11, and filing fees and administrative costs for the process are lower.

This ultimately reduces the cost of the bankruptcy to the business. The financial relief may go even further since the court has the power to modify certain debts, lower the interest rates the business is paying or even wipe out some of the company’s unsecured debts completely. 

That does not mean that the creditors are entirely without rights in the situation, however. Any reorganization plan proposed must still give creditors at least as much as they would get if the company liquidated under a Chapter 7 bankruptcy, and any collateral the company put up against its debts may be at risk. 

What’s the final verdict on a Subchapter V bankruptcy? 

Subchapter V bankruptcy has some definite benefits for small businesses grappling with big financial challenges. By providing a streamlined filing process, more flexible debt restructuring options and additional opportunities for debt discharge, Subchapter V bankruptcy empowers small businesses to overcome their financial obstacles and emerge stronger than ever — despite their economic struggles.

If your small business is facing financial distress, you want to take your time as you explore all the available options. Seeking professional guidance to determine the best course of action is wise. With Subchapter V bankruptcy, your small business can navigate the path to financial recovery with confidence and resilience – and that can lead to a much brighter future ahead.