Small Business Bankruptcy Solutions

In March of 2020, the economy ground to a halt as restrictions and lockdowns were put into place to stem the spread of COVID-19. Especially hard hit were small businesses, many of which had to shut their doors entirely and seek bankruptcy protection. Fortunately, just before the global pandemic surged, the Small Business Reorganization Act (SBRA) went into effect. The SBRA makes a streamlined version of Chapter 11 reorganization available for small businesses under Subchapter V of Chapter 11. This process allows a small business to restructure its debts over time while retaining its property and inventory, as in a normal Chapter 11 bankruptcy, but removes some of the more cumbersome requirements of Chapter 11, making the process more accessible to struggling businesses.

To qualify for a Subchapter V bankruptcy, the business must:

• Owe less than $2,725,625 in secured and unsecured debt (this limit was raised to $7,500,000 as part of the CARES Act);
• Pay at least what its creditors would obtain under a Chapter 7 bankruptcy;
• File a plan of reorganization within 90 days after entering bankruptcy;
• Devote all discretionary business income to repaying the debt; and
• Allow a court-appointed trustee to investigate the debtor’s financial affairs.

Subchapter V deviates from a typical Chapter 11 bankruptcy in several substantial ways. For example, a committee of creditors is generally not appointed by the court. Additionally, the trustee takes a more active role in facilitating plan confirmation, which is easier to obtain under the relaxed standards of Subchapter V. Finally, unsecured creditors are not required to consent to receiving less than the full amount of the debt they are owed in order for a plan to be confirmed. This removes one of the main obstacles to plan confirmation in the ordinary Chapter 11 process.

COVID-19 has brought even the most profitable of small businesses to the brink. For businesses struggling in the wake of COVID-19, bankruptcy could offer a way to restructure and survive mounting debt. If you would like to discuss your options with a bankruptcy attorney, contact us at 317-825-5110.

This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion of any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.