Understanding Subchapter 5 Business Bankruptcy

E.J. Simonsen | Feb 15, 2022

The decision to file for business bankruptcy isn't an easy one, but it's good to know that there are measures that are being taken to make bankruptcy less stressful and more affordable for small businesses. In this blog, we'll discuss Subchapter 5 bankruptcy: a business bankruptcy option made available specifically for small businesses. 

Let's take a look at what Subchapter 5 bankruptcy is, which businesses are eligible, and what benefits it can provide a business struggling with overwhelming debt. 

What is a Subchapter 5 Bankruptcy?

A Subchapter 5 Bankruptcy is a type of bankruptcy that lives under Chapter 11 of the U.S. Bankruptcy code — A Chapter 11 bankruptcy is also known as the "reorganization" bankruptcy. Subchapter 5 was added to the code to make reorganization bankruptcy more accessible to small businesses. This type of bankruptcy is relatively new and went into effect in 2020, but it's an important resource for small business owners. 

Under Subchapter 5 bankruptcy, small business owners can reorganize debt and develop a plan to pay off remaining debt, without shutting down business operations. One of the most commonly referred to features of a Subchapter 5 bankruptcy is the ability of the business owner to use the plan to shed unsecured debt

What's the Difference Between Subchapter 5 and Regular Chapter 11 Bankruptcies?

The biggest difference between a standard Chapter 11 bankruptcy and a Subchapter 5 bankruptcy is complexity and control.

A Subchapter 5 business bankruptcy is more streamlined, faster, and is far less expensive than a typical Chapter 11 bankruptcy. Additionally, a Subchapter 5 bankruptcy puts the business owners firmly in the driver's seat as they get to keep their equity, maintain control, and are the only party who can submit a debt restructuring plan. 

How Does a Texas Business Qualify for Subchapter 5 Business Bankruptcy?

Fortunately, in June 2022, Congress once again increased the non-contingent debt limit cap to $7.5 million through June 21, 2024.

To qualify for a subchapter 5 business bankruptcy, your business must:

  1. Actively pursuing business activities
  2. Have 50% of your business debt coming from business activities
  3. Have non-contingent debt of less than $7,500,000. 

 So, if your business didn't qualify before, it may be worth talking to a Texas business bankruptcy attorney to consider your options. 

What Are the Benefits of a Subchapter 5 Bankruptcy?

Subchapter 5 bankruptcy was added to the Chapter 11 U.S. Bankruptcy code for a reason. For small businesses that are eligible, it provides several benefits that help keep business moving and give business owners the space they need to become profitable again.

  • Continued business operations: Known collectively as the "reorganization" bankruptcy, all types of Chapter 11 bankruptcy allow a business to remain operational while developing a debt reorganization and repayment plan that helps the business become profitable again. 
  • Quicker bankruptcy process: The goal of Subchapter 5 business bankruptcy is to present a more accessible option for smaller businesses. With reduced reporting requirements and fewer opportunities for creditors to disrupt the process as a whole, Subchapter 5 business bankruptcy is much faster, and thus less expensive, than a traditional Chapter 11 bankruptcy.
  • 3-5 year business debt repayment plan: Subchapter 5 business bankruptcy allows a small business to spread debt repayment over 3 to 5 years, a much lengthier repayment timeline than many other business bankruptcy options. 
  • Only a business owner may put forth a reorganization plan: In a traditional Chapter 11 bankruptcy, creditors can put forth a business reorganization plan in response to one from a business that they do not agree with. In a Subchapter 5 bankruptcy, only the business owner may put forth a reorganization plan, which ensures that the business owner must only agree to a plan that he or she feels is reasonable for their business.
  • The bankruptcy court can confirm a business reorganization plan without creditor approval: In a traditional Chapter 11 bankruptcy, a business's proposed reorganization plan is subject to the approval of creditors. In Subchapter 5, the court has the authority to confirm a business's plan, even if those creditors do not agree. This goes a long way to speed up the process and ensure a small business is awarded a favorable reorganization plan.

  •  No required disclosure statement: In other bankruptcy cases, it's often required that the business owner file a detailed disclosure statement with the court that is designed to illustrate how your business functions and whether you can repay your creditors. While this is useful to the court, it can affect the privacy of your business. In a Subchapter 5 case, no such disclosure statement is required. 
  • Pay back administrative expenses in installments: Traditional Chapter 11 bankruptcy cases require that a business immediately pay back all administration expenses once your reorganization plan is approved and becomes effective. With Subchapter 5, a business can spread those payments out across the term of your repayment period.

Although Subchapter 5 bankruptcy is a new addition to the bankruptcy code, it has proven to be a highly effective and cost-efficient means of relieving burdensome debt and restoring a struggling business to profitability.

If you think your business might benefit from a Subchapter 5 business restructuring bankruptcy, or if you're exploring options to better manage your business's debt, our attorneys are here to help.

For more information or guidance from experienced business bankruptcy attorneys, talk to The Lane Law Firm today.

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