Historically, struggling businesses considering bankruptcy had only two options under the U.S. Bankruptcy Code—Chapter 11 for corporate reorganization or Chapter 7 for liquidation. These proceedings have long dominated the strategies of business owners and other stakeholders and will certainly continue to play a formidable role for distressed businesses in the years ahead. While each has redeeming features that continue to attract petitions, both also have significant and well-known downsides.

Specifically, Chapter 11 is frequently exceedingly expensive and cumbersome, while Chapter 7 requires stakeholders to cede all control and input to a court-appointed trustee and often results in a hard shutdown. Fortunately, businesses and their creditors have various other options available to them to either rehabilitate their capital structure to move toward profitable operations or facilitate a formal wind down and sale of their assets. Two of these alternatives are Subchapter V, an amendment to Chapter 11 through the Small Business Reorganization Act (SBRA) of 2019, for small business reorganizations, and ABCs, a formal insolvency proceeding undertaken pursuant to state law, as a liquidation alternative.

There exist many other in- and out-of-court options and proceedings for companies, and certainly a Chapter 11 or Chapter 7 filing may be the best course of action for a given situation. Any business in distress or insolvency, in concert with its stakeholders, must weigh the pros and cons of each option to determine which path forward is likely to be the most beneficial. However, for SMBs in particular, Subchapter V and ABCs and their potential advantages should be fully understood before deciding on a path forward.

While much has been written on Subchapter V and ABCs individually, less attention has been paid to the comparative factors of the two. Admittedly, such a comparison may appear at first blush to be a fruitless exercise because they have fundamentally different purposes—one, reorganization, and the other, liquidation. However, further analysis reveals the following fundamental and common factors that attribute to their growing popularity:

  • Speed and simplicity
  • Control and risk mitigation
  • Cost and value

Subchapter V and ABCs may not grade highest on all of these factors in all situations. No proceeding is without its risks, downsides, and disadvantages, and Subchapter V and ABCs are not exceptions. However, SMBs and their advisors should understand the potential relevancy of these proceedings for reorganizations and wind downs and how they differ at a macro level from their better-known counterparts, traditional Chapter 11 and Chapter 7.

While Chapters 7 and 11 dominate the headlines, savvy professionals should be aware of ABCs and Subchapter V as viable alternatives in certain cases. Given potential advantages that include lower cost, greater retention of value, and certainty of outcome, it is not surprising that Subchapter V and ABCs are attracting the attention of SMBs and their advisors when an expedited reorganization or expedited sale and liquidation are necessary. As always, the complete facts and law applicable to each situation should be well understood and assessed by an enterprise and its stakeholders before deciding which insolvency option to pursue.