Subchapter V of Chapter 11 for Small Business Debtors
Small business debtors in the Tampa Bay area that are planning to file for Chapter 11 bankruptcy should know that they can now elect to file for bankruptcy under Subchapter V of the U.S. Bankruptcy Code. This change occurred through the passage of H.R. 3311, also known as the Small Business Reorganization Act of 2019. According to the text of the legislation, the new subchapter of the bankruptcy code is designed to “streamline the bankruptcy process by which small business debtors reorganize and rehabilitate their financial affairs.” The new law took effect with cases filed on or after March 1, 2020.
In order to understand how the Act will change how small business debtors file for Chapter 11 bankruptcy in 2020 and moving forward, it is essential to understand first how the law defines a small business debtor. Next, we will provide you with additional information about how Subchapter V will amend the process of a Chapter 11 bankruptcy for small business debtors in South Florida.
Who Counts as a Small Business Debtor?
Not all business owners who want to file for a reorganization bankruptcy will file under Subchapter V of U.S. Bankruptcy Code. To be sure, the Act only applies to those businesses that are defined as “small business debtors.” What is a small business debtor? To qualify as a small business debtor, the following must be true of the person or entity:
- Engaged in commercial or business activities with an aggregate secured and unsecured debts of $2,725,625 or less; and
- Cannot be engaged in commercial or business activities that include single asset real estate.
If a person or entity qualifies as a small business debtor, it can elect to file under Subchapter V and those new terms will be applicable to the Chapter 11 bankruptcy case.
Legislative Aims Behind Subchapter V
As the text of the legislation explains, only about 20 percent of small businesses in the U.S. currently “survive the first year,” meaning that about 80 percent of small businesses go out of business after just a single year. Then, by the “five-year mark only 50 percent are still in business and by the ten-year mark only one-third survive.” To put those figures another way, only about 10 percent of small businesses opened remain open for five years or longer, and fewer than 4 percent of those businesses are still open after 10 years.
A majority of small businesses are family-owned or startups, and the reasoning behind the Act was that there is a great need to make it easier for small businesses to reorganize their debts to remain open. Yet prior to the Act, existing Chapter 11 requirements made it difficult for many small businesses to file for a reorganization bankruptcy. In other words, the Act aims to increase those percentages of small businesses that remain open at 1 year, 5 years, and 10 years.
Key Changes for Small Business Debtors Filing for Chapter 11 Under Subchapter V
As we discussed above, Subchapter V is supposed to make it easier and clearer for small business debtors to file for Chapter 11 bankruptcy. The following are some key changes for small business debtors in 2020:
- Time to file a repayment plan is shortened to 90 days;
- Small business debtors do not need to file a disclosure statement;
- No need to have a solicitation of votes of creditors;
- More flexibility in requiring secured creditors to agree to the terms of the repayment plan;
- No more formal appointment of the creditors’ committee; and
- Appointment of a trustee under Chapter V.
In short, these changes are designed to make Chapter 11 bankruptcy less expensive for small business debtors, and to make it more appealing for businesses that are struggling.
The appointment of a trustee might seem frightening to a Chapter 11 debtor, but it’s really not. The role of the trustee is to provide business guidance and to assist in the reorganization efforts, not to usurp the debtor’s control of the business.
Contact a Small Business Bankruptcy Attorney in Tampa
If you have questions about filing for Chapter 11 bankruptcy under Subchapter V, an experienced Tampa bankruptcy lawyer can assist you. Contact Tampa Law Advocates, P.A. for more information.