There were 33.2 million small businesses in the United States in 2022, which shows their vital economic contributions. So when their operations encounter financial problems, small business bankruptcy impacts proprietors and the local economy. In such instances, small business owners must hire a bankruptcy lawyer at the start of their case.
Small business creates more jobs and boosts the gross domestic product (GDP), keeping the country running. Moreover, it leads the innovation and diversification of the local market and keeps taxes at home. Additionally, it is advantageous to the community by creating its identity and improving the residents’ standard of living.
So what will happen when a small business undergoes financial problems? What kind of protection does the government offer? This article will discuss small business cases under Chapter 11 Subchapter V, the process you must go through when you file as a business owner, and why you need a top-rated bankruptcy attorney to guide you.
What Is Chapter 11 Bankruptcy?
Chapter 11 is a reorganization bankruptcy for a corporation or partnership. It allows the debtor to propose a reorganization plan to keep the business going and to pay creditors according to the proposal within a specific period. The debtor controls the business operations, acts as a trustee, and borrows money with the court’s approval.
The creditors must vote on the proposal of the reorganization plan since it will affect them directly. The court must confirm the required votes and ensure the debtor’s proposed reorganization plan meets legal requirements. It starts with a petition in the principal place of business or the debtor’s domicile residence. Then, the debtor must submit the required documents to the court.
- List of assets and liabilities.
- List of current income and expenditures.
- List of executory contracts and unexpired leases.
- Financial statement.
The debtor must pay a filing fee and miscellaneous administrative fee, which must settle with the court clerk during the case filing. Failure to pay may result in the dismissal of the case. But, the debtor can pay in installments with the court’s approval. The petition must include other information regarding the debtor and the business unit.
- Social security number or tax identification number.
- Residential address.
- The primary location of the business.
- The debtor’s reorganization plan.
- A request for relief.
All this information must be in a written disclosure statement concurrently with a reorganization plan. The debtor must file the documents to the court, and once approved, the voting starts. After collecting and tallying ballots, the court will schedule a hearing to confirm the proposal. This process takes time and money at the expense of the debtor.
Under Chapter 11, small business debtors file for bankruptcy cases and are less likely to be reorganizing. So Congress made a provision, the Small Business Reorganization Act of 2019, to help this struggling sector improves its success rate. The amendment creates Subchapter V under Chapter 11 bankruptcy.
What Is A Small Business Bankruptcy – Chapter 11 Subchapter V?
As the name denotes, Chapter 11 Subchapter V, also known as the Small Business Reorganization Act of 2019, applies to small business owners. It includes those chains that operate locally and with employees or workers of less than 5000. Chapter 11 Subchapter V can save more small businesses undergoing financial difficulties in paying their debts.
Controversy surrounds Chapter 11 Subchapter V, an additional provision for small business bankruptcy. It becomes difficult for creditors because the majority are small businesses too. But the significant difference is the shift of the bankruptcy process from the standard Chapter 11 to the one with the added Subchapter V for small business bankruptcy.
Understanding the change in the process under Chapter 11 will benefit debtors, creditors, and lawyers when filing for small business bankruptcy. A firm grasp of this new provision allows bankruptcy attorneys to provide clients with the correct information on its requirements. Knowing the update on the amendment provides timely legal support for their client.
What Happens When A Small Business Files For Bankruptcy?
When a small business files for bankruptcy, it will fall under Chapter 11 subchapter V. Congress has made the changes to streamline its process. It aims to lessen the cost and processing time which would result in a successful reorganization. It also provides a venue for the creditors to have a new role in the reorganization plan.
So when you file for a small business bankruptcy, expect several changes from the previous Chapter 11. Consult a bankruptcy attorney before filing your case. They can discuss these changes, which affect each party differently. How does the new process compare to the standard Chapter 11?
Eliminates The Official Committee Of Creditors
The removal of the Official Committee of Creditors came from the premise that in the ordinary Chapter 11, creditors who should play a primary role in monitoring the reorganization plan failed to do so. They had no significant participation in small business bankruptcy cases under Chapter 11.
Aside from creditors’ lack of involvement in monitoring small business bankruptcy cases, the change addresses another concern. Eliminating the Official Committee of Creditors lowers the filing cost by removing professional fees the committee incurs in the standard Chapter 11. The debtor has to shoulder this cost to get approval for the proposed reorganizational plan.
This change is advantageous to the debtor who must be burdened with unpaid debts and has to pay a high cost in filing the case. So dropping the committee from the process ensures a higher success rate for debtors filing for small business bankruptcy. No more voting from the creditors, thus saving time and money.
Does Not Require A Disclosure Statement
Excluding a disclosure statement in filing small business bankruptcy under Subchapter V is additional proof of creditors’ lack of involvement. However, it works to the advantage of the debtor. This change lessens the information or documents the debtor needs to submit to the court. As a result, filing a small business bankruptcy is cost-efficient.
Removing a disclosure statement from the requirements does not free the debtor from giving some information to the creditors. It includes a brief history of the business, liquidation analysis, and an estimate of the plan’s timeframe of payment schedules. But before filing any information or document, talk to a bankruptcy attorney first to guide you on the required information.
Only The Debtor Files The Reorganization Plan
Chapter 11 allows creditors to file a competing plan after the exclusivity period of the debtor’s reorganization plan expires. Under Chapter 11 Subchapter V, only the debtor files the reorganization plan. Thus, it streamlines the process and eliminates more involvement of the creditors in the case.
Removes The Absolute Priority Rule
The most notable difference between Chapter 11 Subchapter V on small business bankruptcy is the deletion of the absolute priority rule. It requires full payment to the creditors before the debtor can receive or retain the equity under a reorganization plan. In short, it is a creditors’ protection provided in the standard Chapter 11 bankruptcy.
With the absolute priority rule eliminated, debtors can confirm a reorganization plan that could have been unconfirmable previously. So it widens the options for debtors in making proposals to pay the creditors. However, it is to the disadvantage of the creditors since it removes their leverage to recover the whole amount owed by the debtors.
This feature is the most significant factor in favor of the debtor. It will be a turning point to change the status quo of small business bankruptcy and increase its success rate. Congress saw the importance of a successful case and provided these changes to support a sector that makes up more than 99.0% of the local economy.
Confirms A Plan Without Creditor’s Consent
Congress allowed the confirmation of the reorganization plan without resulting in the removal of the voting system. So whether the creditor agrees or disagrees, Subchapter V favors the reorganization plan. It is pro-debtors and allows options for its confirmation but still retains a degree of protection for creditors.
A reorganization plan must pass the “fair and equitable” test. So meeting the test becomes a requirement for making it confirmable. It includes making all payments to the creditors under the proposed plan within three to five years. It shows that debtors value their debts, especially unsecured ones by honoring what they owe to the creditors.
Chapter 11 Subchapter V considers small business debtors. It ensures the success of small business cases when filing bankruptcy by eliminating steps that would prolong the process and make it costly. However, it also guarantees that creditors are given value through a “fair and equitable” plan. So how to file a small business bankruptcy case under Subchapter V?
How To File For A Small Business Bankruptcy?
Chapter 11 differs from Subchapter V due to the latter’s lesser requirements, shorter processing time, and more economical. These changes benefit the already financially troubled small business owner to seek relief from creditors through bankruptcy protection. There are a few requirements to file for small business bankruptcy.
Qualifying The Eligibility Requirements
The first step in filing for small business bankruptcy is determining if your eligibility file under Chapter 11 Subchapter V. This only applies to those engaged in business activities with a total of secured and unsecured debts of not more than $2,725,625. Then, when you go to court, you must specify you will file for small business bankruptcy under Subchapter V. Otherwise, the court will treat your case as a standard Chapter 11 bankruptcy.
Providing A Few Documents
Small business bankruptcy requires only a few documents, including your most recent balance sheet, cash flow statements, a statement of operations, and federal income tax returns. As previously stated, there is no need to submit a disclosure statement. When you complete these documents with the help of a bankruptcy attorney, you can file your petition to the court.
Filing A Petition
You must pay the filing and miscellaneous administrative fees to the court clerk before submitting your petition. With the petition, you must provide a brief history of your business operations, liquidation analysis, and the schedule of your payments under your reorganization plan. Let your bankruptcy attorney prepare these documents to achieve a consensus.
Submitting A Reorganization Plan
After the court receives the petition, it will hold a status conference within 60 days. The debtor must submit to the court a written report on the ongoing negotiations of creating a consensual bankruptcy reorganization plan 14 days before the conference. The debtor must submit it after 90 days of filing the petition.
A consensual reorganization plan can lead to discharge upon confirmation. Non-consensual requires you to make all the payments to your creditors. Subchapter V has many nuances, so you need a bankruptcy lawyer to guide you.
Though the process is streamlined and cost-effective, the skills and experience of making a “fair and equitable” reorganization plan spell the success or failure of your case. Your bankruptcy attorney can handle this, so you will have peace of mind knowing they know the procedure well. But what happens to the case after the exclusivity period expires?
What Happens After Chapter 11 Subchapter V?
The desired result using Subchapter V is a successful case, which means the debtor has accomplished all details in the reorganization plan. The small business debtor remains “in possession,” continues operating the business, and acquires funds to supplement its capitalization. So small business bankruptcy proves to be advantageous under the recent provision.
Success in filing has several benefits for small business owners. It includes relief from your debt faster, with less expense, and follows a simplified process. However, you must talk to bankruptcy lawyers when filing a case because they have a comprehensive knowledge of the law governing Subchapter V. They can help you with the process, especially in creating a “fair and equitable” plan for the success of your case.
Hire A Top-Rated Bankruptcy Attorney
Though Chapter 11 Subchapter V is a simplified process, you need a top-rated bankruptcy lawyer to help you. First, they can verify if you are eligible under Subchapter V. A bankruptcy lawyer can study your eligibility, prepare needed documents, and finalize your application when you qualify.
A top-rated bankruptcy lawyer at Lincoln-Goldfinch Law can represent you in court when filing your petition to follow the correct process. They must specify you want to get debt relief under small business bankruptcy. Most crucial, they can guide you in making a reorganization plan that is “fair and equitable” to you and your creditors. It ensures the success of your case and the continued operations of your business, thus, protecting your assets and legacy.
Chapter 11 Subchapter V for small business bankruptcy provides debtors a tool to get relief from debts successfully. The process becomes streamlined and cost-effective to help small business owners recover immediately. The amendment removes the creditors’ committee and the voting system, disclosure statement, competing plan, and the absolute priority rule.
Subchapter V allows the creation of a reorganization plan without the consent of the creditors as long as it is “fair and equitable.” So these changes ensure the success of small business bankruptcy by the debtor. A bankruptcy lawyer at Lincoln-Goldfinch Law has a comprehensive understanding of this provision to guide you if you decide to file now.
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