Bankruptcy Considerations During the Coronavirus (COV-19) Part 4: The Small Business Reorganization Act and Subchapter 5 Bankruptcy

As a result of the Coronavirus (COV-19), millions of small businesses have been forced to close their business operations entirely with seemingly no end in sight. Naturally, this has led to a spike in bankruptcy filings.  However, many small businesses have held out hope for federal stimulus aid before deciding on whether bankruptcy is the right option for them.

The enactment of a new bankruptcy law, the Small Business Reorganization Act, may provide small businesses suffering from COV-19 related financial issues with relief.  The purpose of the act was to make the benefits that larger business entities may take advantage of when filing for a Chapter 11 reorganization bankruptcy easier to access for smaller business entities seeking relief from debt without going out of business.  The Act simplifies the process by allowing small businesses to file a Subchapter 5 bankruptcy reorganization.

The general purpose of filing a Chapter 11 and/or a Subchapter 5 bankruptcy is to allow a small business to continue to operate its business during bankruptcy and after the bankruptcy’s close.  A reorganization plan is created to establish how the business will pay back its creditors while allowing the business to continue to generate revenue.  For more information on Chapter 11 bankruptcies, please view part 1 of this blog series “Bankruptcy Considerations During the Coronavirus (COV-19) Part 1: Chapter 11 Bankruptcy” and our website.

The Small Business Reorganization Act makes it easier for small businesses to take advantage of the benefits provided in Chapter 11 bankruptcy while avoiding the general high costs associated with such a bankruptcy by allowing them to file a Subchapter 5 bankruptcy.  Some of the benefits of filing a Subchapter 5 bankruptcy include but are not limited to the following:

• A U.S. Trustee will be assigned to each small business to perform duties similar to what a Chapter 13 Trustee performs including but not limited to efforts to ensure that the small business stays on track of its plan.
• The small business debtor will not be required to file a disclosure statement in conjunction with its plan. Further, the small business debtor will not have to deal with competing plans as creditors are prevented from doing so.  These changes significantly decrease the potential costs that a small business debtor may face when filing a Chapter 11 bankruptcy.
• The small business debtor will not have to deal with creditor committees which ordinarily significantly burden the debtor when trying to get its plan approved.

In order to be eligible for filing a Subchapter 5 bankruptcy, the debtor must be an individual or small business engaged in commercial or business activity that has no more than $2,725,625.00 in secured or unsecured debts, excluding debts that may be owed to insiders or affiliates.

When filing a Subchapter 5 bankruptcy, it is required that the small business debtor have federal tax returns, statement of balances, and other related financial documents to establish the debt owed and to outline the current business operations.  This will be important because a plan will be required within 90 days of filing a Subchapter 5 bankruptcy.  Therefore, pre-planning will be key in making sure a plan can be filed timely and to ensure that the bankruptcy goes smoothly.

The decision on whether to file bankruptcy is a difficult one and the process for filing bankruptcy may be confusing and time consuming.  We want to help advise you through these hard times that have been brought by Coronavirus and discuss the options available to you.  Therefore, if you have any questions or would like to discuss the benefits of filing a Subchapter 5 bankruptcy, please visit our website or contact one of our New Jersey bankruptcy lawyers at (973) 890-0004.