If you are not a bankruptcy lawyer, read this. And if you are a bankruptcy lawyer, you should too. If you represent small businesses, whether in deals or disputes, you should know about a useful tool that is being overlooked by many. It allows small businesses to restructure their debts and emerge with a clean bill of health and ownership intact. I am talking about Subchapter V bankruptcy. It was introduced as part of the Small Business Reorganization Act of 2019, and it came into effect at the end of February 2020. You probably did not even notice. In fairness, we did have a little pandemic just a few weeks later.
Subchapter V basically allows small business owners with debts of no more than $7.5 million (thanks to the CARES Act) to retain control of their business and reorganize their debts through a streamlined process without the burdens of a creditor’s committee or the expenses of monthly US Trustee fees. It is faster and cheaper than a typical chapter 11. This is particularly helpful for small business owners who may not have the resources or time to engage in lengthy creditor negotiations and court proceedings.
The streamlined Subchapter V process can be completed in a more efficient manner, saving both time and money for the owner. Small business owners can also take advantage of a number of other benefits, including the ability to reduce their debt obligations, sell encumbered assets, and assume or reject burdensome leases and other contracts. These tools can be lifesavers for business owners facing overwhelming debt obligations, cash flow concerns, or the risk of losing litigation.
But the most obvious benefit of Subchapter V is that it provides small business owners with a vehicle to save their businesses. Many small business owners facing financial distress may feel as though they have no option but shut down. Perhaps worse, others will put themselves in personal debt, borrowing money and even mortgaging their home to keep the business afloat. But now you can offer them a lifeline. Subchapter V bankruptcy can allow them to restructure and emerge from bankruptcy with clean balance sheets and more viable entities.
Of course, it’s important to note that Subchapter V bankruptcy is not right for every small business owner. Before deciding to file any bankruptcy, business owners should carefully consider their options and consult with a qualified business bankruptcy attorney. If your client is struggling financially or perhaps they risk losing that major litigation, Subchapter V may help you help them get back on track.
Author: Jeffrey Bast