For many years, Chapter 11 bankruptcy was impractical for small businesses because of its expense and complexity. Small businesses were often limited to filing Chapter 7 bankruptcy, also known as liquidation, and shuttering their operations.
The barriers for small businesses to enter Chapter 11, with its unique protections and opportunities, was not lost on attorneys, judges, and legislators, giving rise to the Small Business Reorganization Act (SBRA) of 2019. The SBRA created Subchapter V of Chapter 11 of the US bankruptcy code.
The SBRA became effective on February 19, 2020. The timing could not have been better in the wake of the pandemic and its impact on small businesses, including those in the hospitality industry.
It has many of the benefits of traditional Chapter 11. Unlike a Chapter 7 case, the trustee cannot sell the debtor’s assets and does not take control over the debtor’s business. The trustee is more like an advisor and handler, facilitating the development of a consensual reorganization plan, appearing at major hearings, and ensuring that the debtor makes timely payments under the plan. In a Subchapter V case, however, the debtor pays the trustee and its own legal fees, but not the legal fees of the creditors.
In Subchapter V, the process moves much more quickly than traditional Chapter 11 cases. The Court holds a status conference within 60 days from the filing. At least 14 days before that conference, the debtor must report in writing on the efforts made, and to be made, to get a consensual plan. The debtor must file its plan of reorganization within 90 days from the filing.
Another advantage to Subchapter V is that only the debtor may file a plan, unlike a traditional Chapter 11 case, in which creditors or other parties in interest may file a competing plan.
And Subchapter V helps debtors dodge protracted disputes. In a traditional Chapter 11 case, the debtor must file and distribute a disclosure statement to provide creditors with information regarding the plan so that they can decide if they like the plan or not. Creditors often dispute the adequacy of the disclosure statement, which leads to delays and court battles. Subchapter V does not require a disclosure statement and avoids other technical disputes raised by creditors.
Subchapter V bases the debtor repayment schedule on projected revenue. This could favor small businesses facing a slow climb out of the pandemic as their projections for the ability to repay creditors are as conservative as they will ever be.
