Chapter 11 - Sub-Chapter V: A streamlined / affordable bankruptcy for small businesses

Subchapter V of Chapter 11 bankruptcy, commonly known as "Sub-chapter 5," was introduced as part of the Small Business Reorganization Act of 2019. It offers a streamlined and more affordable bankruptcy process specifically designed for small businesses. There are several key aspects of Subchapter 5 that make it a beneficial option for qualifying small businesses.

Subchapter 5 simplifies the bankruptcy process by eliminating certain requirements and reducing administrative burdens. Under Subchapter 5, small businesses are not required to prepare a disclosure statement or obtain creditor approval for the reorganization plan. This significantly reduces the time and costs associated with traditional Chapter 11 bankruptcy filings, making it more accessible for small businesses with limited resources.

Sub-chapter 5 encourages greater creditor cooperation and participation in the reorganization process. It requires the appointment of a trustee, typically a standing trustee, to facilitate the negotiation and approval of a consensual reorganization plan. The trustee's role includes assisting the debtor in developing the plan, mediating disputes, and ensuring the plan meets the legal requirements. This trustee involvement helps foster an environment of collaboration between the debtor and creditors, increasing the chances of reaching a successful resolution.

Sub-chapter 5 offers greater flexibility in debt repayment by extending the time period for plan payments. In traditional Chapter 11, debtors typically have a limited timeframe to propose a plan and make payments. However, Subchapter 5 allows for a three-to-five-year repayment period, giving small businesses more breathing room to reorganize their finances and generate sufficient cash flow for debt repayment.

Sub-chapter 5 provides opportunities for owners to retain ownership and control of their businesses. In certain cases, the debtor can modify the rights of secured creditors by reducing or cramming down the debt to the value of the collateral. This can be particularly advantageous for small business owners who want to keep their business operational and retain their equity stake, even if the business is burdened with significant debt.

In summary, Subchapter 5 of Chapter 11 bankruptcy offers a streamlined and more affordable bankruptcy option tailored specifically for small businesses. By simplifying the process, fostering creditor cooperation, extending the repayment period, and allowing for greater flexibility, Sub-chapter 5 provides small businesses with a viable path to reorganize their finances, retain ownership, and emerge from bankruptcy stronger and more financially stable.