In Chapter 11 Bankruptcy, there is what is known as a Subchapter V. There are significant benefits for a small business to file Subchapter V instead of a typical Chapter 11. This includes two (2) complicated but important concepts: “Absolute Priority” and voting/plan approval.
Absolute Priority requires that in a typical Chapter 11 case, the shareholders/owners of the business must generally not benefit from any discharge of corporate debt. So if a company is “relieved” of its debt, the shareholders/owners must typically pay into the proposed plan an amount from their own pockets to avoid them benefiting at the detriment of the creditors. Subchapter V cases do not require that a Plan meet the requirements of Absolute Priority.
Also, Subchapter V cases can be approved without the creditors consent. Although a Chapter 11 Plan can be confirmed without creditor consent, it is very difficult, expensive, and generally avoided, if possible. Subchapter V plans have a much lower threshold for confirmation.
The time issue relates to the amount of debt that a debtor (individual business owner or company) can have to qualify for a Subchapter V. Typically, a business debtor with non-contingent, secured and unsecured debt less than $2,725,625 may elect Subchapter V treatment. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress increased the cap to $7,500,000 for at least one year from its effective date of March 27, 2020, which was set to expire on March 27, 2021.
On March 27, 2021, President Biden signed into law the COVID-19 Bankruptcy Relief Extension Act. The COVID-19 Bankruptcy Relief Extension Act extends the increased debt limit to March 27, 2022.
Currently there is no discussion about a further extension of the Subchapter V debt limits. Business debtors with more than $2,725,625 but less than $7.5M in debt are STRONGLY ADVISED to take advantage by filing a case by March 27, 2022.
As the decision to file bankruptcy of any kind is one which should be considered carefully with an experienced attorney and preparation for the filing and administration of a Subchapter V Small Business Bankruptcy requires time with counsel, we strongly urge any small businesses to immediately consult. Contact us today for a free case consultation.
