A law passed in August of 2019, called the Small Business Reorganization Act (SBRA), was set to go into effect in February 2020. At the time of its passing, this law was not seen as one that would become a lifeline for countless small businesses trying to stay alive. In the wake of the COVID-19 pandemic ravaging our nations economy—SBRA, more commonly known as Subchapter V, makes filing for bankruptcy under Chapter 11 more accessible for small businesses. Subchapter V is designed to allow business owners to keep their business, perfect for businesses affected by COIVD-19 closures, riots and other reversals.
To be eligible for Subchapter V, a debtor must be engaged in commercial activity and its total debts must be less than $7,500,000, including secured and unsecured debts (increased from $2,725,625 on March 27, 2020, by the CARES Act and remaining in effect for one year). At least half of these debts must come from the business activity conducted by the debtor. The primary activity of this business cannot be a single-asset real estate operation. The debtor must elect to proceed under Subchapter V, otherwise the regular Chapter 11 rules will apply. The new law does provide for a Subchapter 5 trustee in the case, but, unlike trustees in Chapter 7 and Chapter 11 cases, the trustee does not take possession of the debtor’s assets or control of the debtor’s business.
When filing its bankruptcy petition under Subchapter V, the debtor is also required to file a balance sheet, statement of operations, cash flow statements, and federal tax returns. This plan must be filed by the debtor within 90 days of declaring bankruptcy. Unless specified by the court, no disclosure statement is required. The debtor is still expected to be able to provide a brief history of business operations, a liquidation analysis, and projections. Payment of administrative expense claims may be prolonged throughout the term of the Chapter 11 plan, and US Trustee Quarterly fees are waived. Lastly, a debtor must satisfy the “Best Interest Test” by providing creditors at least as much as they would receive if the debtor were liquidated and not reorganized.
The primary benefit of filing for bankruptcy under this chapter is the ability to stop all creditors from chasing the debtor. Subchapter V makes it easier for a business to pause or get rid of some of their obligations, like leases, in order to get through uncertainty. All debts will eventually still need to be repaid, but Subchapter V includes a provision allowing debtors to restructure (or eliminate) debt by using their projected disposable income to pay creditors back over three to five years. (“Disposable income” is defined as income not needed for the payment of expenses necessary to the continuation, preservation and operation of the debtor’s business.) Subchapter V also allows small business owners to keep their equity as long as they distribute that disposable income to creditors over the given period of years. Business owners can now more easily hold onto their business under Subchapter V, giving them a much better opportunity at keeping their equity interest.