ELIGIBILITY FOR SUB-CHAPTER V ELECTION

Sub-chapter V election by a small business requires that the debtor have non-contingent, liquidated debts (secured and unsecured) totally not more than $2,725,625..00 (presently for small business election under Chapter 11 the debt limit is $2,566,050.00). The Debtor may be a corporate entity, partnership or an individual engaged in business. The only excluded activity for the small business debtor is operating “single asset real estate,” another defined term in the Bankruptcy Code that describes a debtor who derives substantially all of its gross income from the operation of a single real property.

Differences between sub-chapter v small business case and chapter 11 small business debtor election

appointment of a trustee

The Sub-chapter V Debtor is a Debtor-in-Possession just like a Chapter 11 debtor. However, in a Sub-chapter V, the Debtor does not deal with the United States Trustee’s office, but rather a trustee is appointed, perhaps even a standing trustee, to administer the case. The trustee will act in the same capacity as a chapter 13 or chapter 12 trustee.

The Sub-chapter V trustee will disburse all plan payments made by the Debtor to creditors and will receive a commission for those disbursements. Thus, in a Sub-chapter V the Debtor will not be required to file Monthly Operating Reports and will not pay quarterly fees to the UST based on its disbursements as it would in a regular Chapter 11 filing.

The trustee is also charged with assisting the debtor in formulation and confirmation of a plan. This will come in the same form as in a chapter 13, in which the trustee reviews the plan and objects to its form and content to the extent the trustee believes the plan is not in compliance with and confirmable under the applicable provisions of the United States Bankruptcy Code.

unsecured creditors committee

Previously, in a Chapter 11 small business case the default rule was that an unsecured creditors committee would be appointed by the UST if there was interest. If a committee was appointed, Bankruptcy Rule 1020 provides that the bankruptcy case can only proceed as a small business case if the court determines that the “committee has not been sufficiently active and representative to provide effective oversight of the debtor.” This vague standard made it unclear when a chapter 11 case should proceed as a small business case because it required the bankruptcy court to find that the committee was not functioning properly.

This constant issue has been alleviated by Sub-chapter V, as the statute provides that no unsecured creditors committee is formed, unless ordered by the Court.

professional fees

Sub-chapter V also, provides a welcome measure to debtors and their counsel. Professionals are not disqualified from being employed by the estate under section 327 of the Bankruptcy Code if they hold a claim against the debtor of less than $10,000 that arose prior to the commencement of the case. 11 U.S.C. 1195. This flexibility in professional retention acknowledges the reality that a small business debtor may lack the cash flow to provide its bankruptcy counsel with a retainer prior to filing bankruptcy.

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