What is Chapter 11 subchapter V?

Chapter  11, Subchapter V of the U.S. Bankruptcy Code is a streamlined version  of Chapter 11 designed specifically for small businesses. It was created  under the Small Business Reorganization Act (SBRA) of 2019, which  became effective in February 2020. The purpose of Subchapter V is to  make the bankruptcy process more accessible, efficient, and  cost-effective for small business owners who need to reorganize their  debts.

1. Eligibility:
    
   • Originally, a business could qualify if its debts (secured and  unsecured) did not exceed $2,725,625. However, due to the COVID-19  pandemic, the CARES Act temporarily increased the debt limit to $7.5  million, an adjustment that has been extended multiple times.

1. Debtor-in-Possession:
    
   • The debtor (the business owner) remains in control of the  business operations throughout the bankruptcy process, unless the court  appoints a trustee to take over due to mismanagement or other reasons.

1. No Creditors’ Committee:
    
   • In a typical Chapter 11 case, a creditors' committee is  formed, which can add complexity and cost. In Subchapter V, there is  usually no creditors' committee unless the court orders one, which  simplifies the process.

1. Appointment of a Trustee:
    
   • A trustee is appointed in every Subchapter V case, but their  role is more limited compared to other types of bankruptcy. The  trustee’s primary job is to facilitate the development of a consensual  reorganization plan between the debtor and creditors.

1. Plan of Reorganization:
    
   • The debtor must file a reorganization plan within 90 days of  filing for bankruptcy. The plan outlines how the business intends to  repay its debts over time. Unlike in standard Chapter 11 cases, only the  debtor can file a plan under Subchapter V, and it doesn't require  creditor approval as long as the plan is fair and equitable.

1. No Absolute Priority Rule:
    
   • The absolute priority rule, which often forces equity holders  (like business owners) to give up their ownership in favor of creditors,  does not apply in Subchapter V. This allows small business owners to  retain their ownership interests even if unsecured creditors are not  paid in full.

1. Discharge:
    
   • The debtor receives a discharge of debts upon completing  payments under the confirmed plan, which can extend up to five years. In  some cases, a discharge can be granted even earlier.

1. Cost-Effective:
    
   • The simplified procedures, absence of a creditors' committee,  and the quicker timeline make Subchapter V less expensive and less  burdensome for small business owners compared to traditional Chapter 11  proceedings.

• Faster and Cheaper: The streamlined process saves time and reduces costs, which is crucial for small businesses with limited resources.
• Greater Control: The business owner retains more control over the reorganization process and the future of the business.
• Retention of Ownership:  Owners can keep their business even if creditors are not fully repaid,  which is often not possible in a standard Chapter 11 case.

• Limited to Small Businesses: Only businesses with debts under the eligibility limit can use Subchapter V.
• Stringent Timeline: The requirement to file a reorganization plan within 90 days can be challenging for some businesses.

Chapter 11, Subchapter V provides a  valuable option for small businesses facing financial distress,  allowing them to reorganize their debts while continuing operations and  potentially retaining ownership of their business.