Subchapter V became effective in February 2020 and is available not only to corporations but to limited liability companies (LLCs), partnerships, individuals, and sole proprietorships as well. In the year since its effective date, more than 1,600 Subchapter V cases have been filed nationwide.

The legislative goal of Subchapter V was simple—to provide a faster and less expensive path for reorganization for small business debtors by addressing the costly and burdensome requirements of traditional Chapter 11. For example, Subchapter V condenses the timeline for a debtor to file a plan and eliminates creditors’ committees and fees to the United States Trustee, which for an individual debtor in Chapter 11 can reach seven figures annually. At the same time, many of the benefits of a traditional Chapter 11 remain available to the debtor, including the ability to liquidate and sell assets free and clear.

While the shorter duration in bankruptcy and reduced administrative costs are certainly hallmarks of Subchapter V, the statute provides debtors with an even more potent advantage: greater certainty to retain post-confirmation control of their businesses and equity thereof without requiring any new capital contribution from the existing equity holders or full acceptance from all creditors. This has given some lenders pause, as the new law appears to afford debtors a novel advantage and is often seen as a tool to pressure lenders to negotiate a consensual plan with the debtor.

If the debtor’s creditors agree to the plan, the debtor can craft its own plan terms and receive a discharge at around the time of confirmation. However, in a nonconsensual plan, the debtor pays to its creditors its projected disposable income for a period of three to five years in exchange for receiving a discharge at the end of plan payments. Thus, Subchapter V encourages debtors to reach agreements with its creditors as well. Assuming a debtor qualifies for Subchapter V and has a clear exit plan, these benefits warrant strong consideration.

The debt limit for debtors to qualify for a Subchapter V was initially set at $2.7 million. That debt limit was temporarily increased to $7.5 million by the CARES Act of 2020, with a scheduled expiration on March 27, 2021, unless extended by Congress. As of the date of this writing, legislation to temporarily or permanently maintain or modify this debt limit is pending before Congress.

Historically, bankruptcy usually signified failure and loss of control for the small business debtor. Assuming the requirements and prerequisites are met, Subchapter V proceedings have provided some owners a smoother pathway to retaining control of their companies and emerging more successful in the years post-filing.

Subchapter V (reorganizations)

Speed and Simplicity

  • Deadline for debtor to file a plan of reorganization is 90 days after the filing, unless extended by the court
  • Disclosure statement requirement is eliminated
  • Initial filings narrowed to basic financials, cash flows and tax returns
  • Creditors’ and equity committees are eliminated, unless ordered by court
  • Confirmation process is simplified—creditor acceptance is not necessary

Control and Risk Mitigation

  • Only debtors can elect a Subchapter V as opposed to creditors or other third parties
  • Role of the U.S. Trustee is significantly limited
  • Only a debtor can file a plan vs. creditors or other parties
  • The absolute priority rule is waived, enabling equity holders to retain their equity without contributing new capital and without full acceptance from all creditors
  • Debtor may modify the plan at any time within the life of the post-confirmation plan, subject to court approval

Cost and Value

  • Debtor’s obligation to pay quarterly U.S. trustee fees is abolished, among other significant expenses
  • Subchapter V trustee fees are typically much lower
  • Professional fees associated with creditors’ and equity committees are eliminated
  • Plan submission process is streamlined via standard forms and guidelines
  • Administrative expenses may be stretched over the term of the plan vs. payable upon confirmation

Disadvantages and Other Considerations

  • Personal liabilities and guarantees may remain with the guarantors
  • Despite automatic stay, debtor may still have to address litigation or other concerns that may have precipitated the Subchapter V filing
  • Debtor must be prepared to progress the case timeline, e.g., readiness for plan filing and court-scheduled status conferences
  • All of debtor’s projected disposable income or value must apply toward the nonconsensual plan
  • Debtor still requires consent from secured creditor to use its cash collateral or must show adequate protection