By James J. Talerico, Jr.
The American Bankruptcy Institute (ABI) predicts a future surge in small business bankruptcy filings. The Small Business Reorganization Act (SBRA) of 2019 – which Congress passed last summer and enacted into law in February when the Covid-19 pandemic began – amended the Chapter 11 bankruptcy code and now offers a new form of bankruptcy protection for qualifying businesses grappling with the Covid-19 crisis.
While Subchapter V does not eliminate Chapter 11, it modifies or eliminates many of its traditional requirements for qualifying businesses while also providing small business debtors with substantial benefits and creditor protections. Subchapter V allows small businesses to pause their obligations so they can renegotiate with lenders, landlords and other creditors, and enables debtors to reduce monthly payments and amounts owed to creditors while also enabling creditors to recoup more than they would during a liquidation. Subchapter V, furthermore, reduces financial and administrative expenses associated with bankruptcy protection for qualifying businesses.
There are three criteria for Subchapter V eligibility. First, relief requires involvement in commercial or business activities. The second requirement is that total non-contingent debt must be less than $7.5 million – which is up from $2,725.625.00, per Section 1113 of the CARES ACT. The third requirement is that not less of 50% of that debt must arise from commercial or business activities. Real estate investors whose primary activity is to own or operate more than one real property are also eligible to file for Subchapter V protection.
Under a Subchapter V filing, a standing trustee is automatically appointed to “facilitate the development of a consensual plan of reorganization.” The Trustee must be accountable for all property received, examine proofs of claim, furnish information about the estate, and administer and file the final report. The trustee needs to, moreover, collect and retain plan payments until conformation of the plan, and make sure the debtor makes timely payments as required under the plan.
The debtor must file a pre-conference report describing the actions taken to create a consensual plan of reorganization. The report provides the bankruptcy court with information about whether the debtor is on track to file its plan within the required 90 days. The plan can be confirmed consensually or by a cramdown. In a non-consensual plan, administrative claims can be paid out over three to five years, but they must be paid up front if consensual. If the court confirms a consensual plan, a debtor is entitled to a discharge upon confirmation. If the court confirms a nonconsensual plan, the debtor receives a discharge after completing all payments due within the first three years, unless otherwise ordered.
When counseling small businesses, it must be determined whether the business applied for a Paycheck Protection Program (PPP) loan. While the CARES ACT contains no limitation on providing PPP loans to debtors in bankruptcy, the SBA has released an interim rule that says companies in bankruptcy are not eligible for PPP loans and that businesses that have filed for bankruptcy protection must cancel any pending PPP loan applications.
Subchapter V modifies or eliminates many of the traditional Chapter 11 requirements for qualifying businesses and makes it easier for these small businesses to confirm their reorganization plan and retain control of both the process and their equity. By law, Subchapter V cannot discriminate, so by design it is fair and equitable to all parties.
According to Forbes Magazine, 30 million small businesses in the US are experiencing financial stress, and 50% of those businesses are experiencing lower sales due to the Covid-19. Because small businesses typically have limited access to capital, it is believed that Subchapter V will provide small businesses with a better chance to successfully restructure their debt accumulated as a result of the current crisis – and this should preserve more businesses and save more jobs !
James J. Talerico, Jr., CMC ©
About the Author –
A nationally recognized small to mid-sized business (SMB) expert, Jim Talerico has consistently ranked among the “top small business consultants followed on Twitter.” With more than thirty – (30) years of diversified business experience, Jim has a solid track record helping thousands of business owners across the US and in Canada tackle tough business problems and improve their organizational performance.
A regular guest on the Price of Business on Bloomberg Talk Radio, Jim’s client success stories have been highlighted in the Wall St. Journal, Dallas Business Journal, Chicago Daily Herald, and on MSNBC’s Your Business, and he is regularly quoted in publications like the New York Times, Dallas Morning News, Philadelphia Inquirer, and on INC.com, in addition to numerous, other industry publications, radio broadcasts, business books, and Internet media.
Jim Talerico is a Certified Management Consultant CMC ©, an honor bestowed on only 1% of all consultants worldwide. He is also the founder and CEO of Greater Prairie Business Consulting, Inc. For more information about Greater Prairie Business Consulting, Inc., go to: www.greaterprairiebusinessconsulting.com.
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Listen to Talerico’s recent interview with Kevin Price on this very subject: