In August 2019, the Small Business Reorganization Act (SBRA) was signed into law and became effective on February 19, 2020. SBRA creates a Subchapter V bankruptcy option that makes it easier and less expensive for small businesses and individual entrepreneurs to reorganize their debts in bankruptcy.

Who Is Eligible?
Only small businesses (this includes sole proprietors and single-member LLCs) who have secured and unsecured debt that totals no more than $2,725,625 combined are eligible to file under Subchapter V bankruptcy. Contingent and unliquidated debt is not included in this calculation but all debt must be accumulated in the process of running the business. Real estate businesses with only a single asset are not eligible to file bankruptcy under this subchapter.

Filing Your Bankruptcy Plan
One of the biggest changes that Subchapter V bankruptcy brings to debtors is how reorganization plans are filed and by whom. Only the debtor may file a bankruptcy reorganization plan. In a traditional Chapter 11 bankruptcy, creditors have the right to submit their own reorganization plan for the debtors. This is NOT the case in Subchapter V bankruptcy.

Debtors must file a reorganization plan with the bankruptcy court within 90 days of filing their petition for debt relief. However, there is no stated limit to amendments to the plan and no deadline for confirmation of the plan so practitioners not ready to move forward with a plan will likely file short, simple plans and then amend.

Another important development is that disclosure statements are NOT required in Subchapter V bankruptcy. This reduces filing costs significantly and it will streamline the bankruptcy plan confirmation process for debtors.

Creditor Approval Not Required
In other Chapter 11 bankruptcy cases, debtors must get an “impaired class” of creditor to approve their reorganization plan if they want confirmation of that plan in bankruptcy over objections and other classes voting ‘no’. However, Subchapter V bankruptcy does not require creditor approval for a plan to be confirmed.

Here’s how it works:

A debtor’s bankruptcy reorganization plan doesn’t need creditor approval as long as that plan does not treat any of the creditors unfairly. In short, a bankruptcy reorganization plan must be “fair and equitable” to all classes of creditors. A plan meets this “fair and equitable” standard when all of a debtor’s disposable income is being used to repay debts.

What Is Disposable Income?
Under the Subchapter V bankruptcy rules, disposable income refers to any income that isn’t being used to support the debtor, the debtor’s dependents, or the continuation of the debtor’s business.

No Absolute Priority Rule
Under the Absolute Priority Rule, debtors cannot continue to hold an interest in their business unless they’ve repaid all of their debts or committed sufficient new value (money) to the reorganization. That rule no longer applies under Subchapter V bankruptcy.  In other words, debtors are not required to invest more capital into a business to maintain their interest in it.

Loan Modification
A very surprising development is that under Subchapter V bankruptcy, debtors may modify a loan as their primary residence that was used to fund their business. It remains true that loans used primarily to fund the purchase of a residence cannot be modified in Subchapter V bankruptcy.

Bankruptcy Discharge
Following confirmation of a non-consensual plan, any debtor under Subchapter V bankruptcy who pays on their plan for at least 3 years is freed from any further obligation to pay the original debt. Of course, the creditor can still pursue the debtor for the remaining debt payments as agreed to under the bankruptcy repayment plan but creditors cannot demand payment for the original debt amount. Following confirmation of a consensual plan, the debtor is freed from further obligation on the original debt, with creditors limited to pursuing what they are owed under the plan.

Bonus Tips:

• A creditors committee will NOT be formed unless ordered by the court.

• Trustees have fewer broad powers than in Chapter 11 or Chapter 7 bankruptcy.

• Subchapter V bankruptcy eliminates the requirement that administrative claims are paid at closing. Administrative claims can now be paid overtime.