Subchapter V Bankruptcy – A potential lifeline for struggling small businesses
By: Gary P. Bluestein
The financial consequences of COVID-19 have been particularly difficult for a large number of American small businesses and with lockdowns accelerating in many states, many of those businesses will be forced to consider a bankruptcy filing. Ironically, legislation enacted by Congress just prior to the COVID-19 pandemic, may have created a much-needed lifeline for many of those businesses. The Small Business Reorganization Act (SBRA) signed into law in August, 2019 added Subchapter V to the Chapter 11 Bankruptcy code, which might ultimately be the answer to how struggling small business can make it through the pandemic.
Bankruptcy has often been a tremendous solution for individuals and businesses facing overwhelming debt issues. For certain types of taxes, such as income taxes, bankruptcy can be a phenomenal tool, since, under the right circumstances, they can be discharged without full payment.
For debtors with little or no non-exempt assets to protect, and dischargeable debt, a Chapter 7 is usually the most useful option. The goal of a Chapter 7 is to give a debtor a “fresh start”, eliminating debt quickly and inexpensively. However, if an individual wants to protect non-exempt assets from being sold by a Chapter 7 Trustee, a Chapter 13 often can be a useful option.
A Chapter 13 debtor can retain all of their assets and pay their creditors over time, often with dischargeable debt being paid at a small percentage of the amount owed. Chapter 13s can also be used for small businesses that are operated under a DBA. However, only individuals can file a Chapter 13. Therefore, if the business is a corporation, LLC or partnership, this option is not available. Previously, under these circumstances, the only alternative was to file a Chapter 11. Although this would allow the debtor to continue operation and maintain its assets, Chapter 11s are very complicated and costly. Often the expense of a Chapter 11 is beyond the reach of a struggling small business.
The newly enacted Subchapter V, as part of the SBRA, became effective in February 2020. This new statutory provision provides relief for small businesses that could not afford the significant cost of a Chapter 11. Sub Chapter V creates a much less complicated procedure for small businesses to reorganize through a bankruptcy filing. Unlike a Chapter 11, creditors do not get to vote on a proposed plan and there is no requirement for a disclosure statement. Additionally, there is no requirement for cost prohibitive payments of quarterly fees to the U.S. Trustee’s Office. Perhaps most significant, the reduction in complexity dramatically reduces the legal fees associated with the bankruptcy filing.
The debt limit for a Subchapter V bankruptcy in the original statute was $2,725,625. However, as part of the Coronavirus Aid Relief, and Economic Security (CARES) Act, Congress increased the Cap to $7,500,000 until March of 2021. This expanded limit substantially increases the number of small businesses that can take advantage of this new form of bankruptcy.
As a result of the financial carnage caused by the COVID epidemic, numerous struggling small businesses will be faced with a decision to file bankruptcy that they never dreamed they would have to make. With the option to choose a Subchapter V bankruptcy now available, many of them now have the ability to pay their creditors over a three to five-year plan in a much more cost-effective manner than the traditional Chapter 11, giving them a potential lifeline to survival.
Bankruptcy has always been a useful option in dealing with taxes and other debt. Subchapter V is now an added tool to help financially troubled clients and will be of even greater importance in saving businesses post Covid.
The attorneys at Andreozzi Bluestein LLP are highly experienced with individual and business bankruptcy, have extensive experience navigating the elimination of tax debt through Bankruptcy, and routinely help clients in actions against the IRS. If you or a client are facing financial hardship, think that bankruptcy may indeed be a viable option, and would like to discuss any of the issues mentioned here directly with one of our attorneys, please call us today with no obligation.
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