What is Subchapter V in Chapter 11 Bankruptcy?

Basics of Subchapter V of Chapter 11 (Small Business Debtor Reorganization)

(August 4, 2023)

What is Subchapter V of Chapter 11 of the Bankruptcy Code?

Subchapter V of chapter 11 of the Bankruptcy Code is a viable option for small to medium sized businesses seeking to implement a court-administered restructuring.  The process allows owners to retain control of the company and its assets while creating a repayment plan with creditors.  Below are some of the main features of subchapter V.

 

Key Advantages for Small Business Debtors in Subchapter V Bankruptcy

  • The Bankruptcy Code’s “automatic stay” means creditors can not exercise any rights against the debtor absent a court order, with limited exceptions. 
  • Debtors can discharge their debts by implementing a reorganization plan that partially repays creditors over time.
  • The company can continue to run the business as a “debtor in possession” during the bankruptcy proceedings.[i]
  • Only the debtor may file a plan.[ii]
  • The plan may be approved with or without creditor consent.[iii]
  • Equity holders can retain their interests under the plan. To do so, the plan must provide for payment of the company’s disposable income towards its unsecured claims for a repayment period of no less than three years and no more than five.[iv]
    • This means unsecured creditors do not need to be paid in full for the debts to be discharged.
  • Administrative expenses, or expenses used to pay the costs of running the business during the bankruptcy (including attorney fees), can also be paid through the plan over the repayment period.[v]
  • A Subchapter V Trustee is appointed by the court and will work toward consensually resolving the case. [vi]
  • Sales of a debtor’s assets can be done before the plan is confirmed under section 363 of the bankruptcy code, meaning assets can be sold “free and clear” of all liens, claims and interests. This may make certain sales more attractive to buyers.  Sales can also be done pursuant to the plan.

Subchapter V Eligibility Requirements: Is Your Business Qualified?

  • Secured and unsecured debts can not exceed $3,024,725.
  • Only noncontingent and liquidated debts are calculated for purposes of eligibility. [vii]
    • The amount of contingent debt – or debt that is only owed if an event occurs after the petition date, such as a default on a loan guaranteed by the debtor – does not affect eligibility.[viii]
    • The amount of unliquidated debt – or debt of an unknown amount as of the petition date, such as a money judgement that still requires entry of a damages award – similarly does not affect eligibility.[ix]
  • At least 50% of the debt must have arisen from the debtor’s commercial or business activities. [x]
  • The following are not eligible:
    • Any entity whose primary activity is a business of owning a single asset real estate;[xi]
    • Publicly traded corporations and their affiliates;[xii] or
    • A member of a group of debtors that has more than $3,024,725 of combined debt (in other words, if the total amount of debt of an existing bankruptcy filer plus the debt of a would-be affiliated bankruptcy filer exceeds $3,024,725, the would-be bankruptcy filer is not eligible).[xiii]

Subchapter V Filing Timeline: What to Expect

  • The debtor must file the plan within 90 days of the petition date.[xiv]
  • There is no confirmation deadline after the plan is filed.

Additional Considerations in Subchapter V Reorganization

  • If secured claims are not being paid in full and do not support the plan, the claims must still be satisfied in full under the plan. This may be done over time or through a single payment.[xv]
    • Importantly, a claim is secured only up to the value of the collateral, and the remaining portion is unsecured.
  • A non-consensual plan must provide for remedies to unsecured creditors if the debtor does make the payments under the plan, including liquidation of assets.[xvi]
  • A consensual plan will result in an immediate discharge, while a plan that is non-consensual will be discharged “as soon as practicable” after completion of the payment plan.[xvii]

Contact Us to discuss Subchapter V and other solutions, including out-of-court restructuring and refinancing.  

 

[i] 11 USC § 1184.  However, the court may remove the debtor in possession, after a notice and hearing, for “cause, including fraud, dishonesty, incompetence or gross mismanagement.” 11 USC § 1185.

[ii] 11 USC § 1189(a).

[iii] 11 USC § 1191.

[iv] 11 USC § § 1181(a) (making 1129(b) inapplicable under subchapter V); 1191(c).

[v] 11 USC § 1191(e).

[vi] 11 USC § 1183(b)(7).

[vii] 11 USC § 1182(1)(A).

[viii] Id.  E.g., In re Parking Mgmt., Inc., 620 B.R. 544, 551-552 (Bankr. D. Md. 2020); In re Free Speech Systems, 649 B.R. 729 (Bankr. S.D. Tex. 2023).

[ix]  Id.

[x] 11 USC § 1182(1)(A).

[xi] Id.

[xii] 11 USC § 1182(1)(B).

[xiii] Id.

[xiv] 11 USC § 1189.

[xv] 11 USC § 1191(c)(1).

[xvi] 11 USC § 1191(c)(3).

[xvii] 11 USC § 1192.

This publication is intended for general informational purposes only.  It does not constitute legal advice, is not meant to be a substitute for advice of counsel, and its distribution does not create an attorney-client relationship.  While every effort has been made to ensure the accurateness of this publication, its contents is not guaranteed to be correct, complete or up-to-date, and may contain inaccuracies and/or typographical errors.  No party, including Ashuraey Law PLLC or the author, assumes any liability in connection with this publication.  Any opinions contained herein do not necessarily reflect the opinions of Ashuraey Law PLLC or any of its clients or employees.  Please feel free out to reach to Sam Ashuraey if you have any questions about this publication.  The contents of this publication may not be quoted or attributed without the express consent of Ashuraey Law PLLC.