Congress is considering the extension of Subchapter 5 in Chapter 11 bankruptcy to help small businesses. When you take into account the continuing effects of the pandemic on small businesses, this extension is essential.
Extending Subchapter 5 to Support Small Businesses
In 2019 Subchapter 5 was added to Chapter 11 of the U.S. Bankruptcy Code with the goal of making reorganization bankruptcies more accessible to small businesses. It went into effect in 2020 and as the pandemic continued to wreak havoc on millions of small businesses, Subchapter 5 was being applied. At the time owners with $2.75 million or less in debt could apply for bankruptcy.
However, as things got worse the expected increase in small business bankruptcies led Congress to expand Subchapter 5 eligibility to $7.5 million for one year in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. If congress doesn’t renew the $7.5 higher limit, it will expire in March.
To date, more than 2,800 cases have been filed since the program started. And that number is going to rise dramatically as small business owners deal with supply shortages, high inflation, and gas prices along with the lingering effects of the pandemic. Banks and landlords are also stepping up their effort in collecting overdue loans and back rent. And all these factors will all contribute to more bankruptcy filings.
Claiming Subchapter 5 Bankruptcy
As originally intended, you have to be pursuing business activities and your debt can not be more than $2.75 million in order to file. Moreover, 50% of the debt must come from business activities, and the debt can’t include those owed to company insiders. Additionally, if the primary activity of your business is owning and running a single property you are not eligible.
Only your business can file for the plan as opposed to other Chapter 11 cases which allowed creditors to file a plan for you. And a special trustee will be named to monitor the business operation and make recommendations about the reorganization plan.
When it comes to making payments for the plan, Subchapter 5 also accommodates the hardship of small businesses. Unlike Chapter 11 cases you don’t have to pay the administrative costs when the plan begins. You can pay the expense over the length of the plan, which can be over three or five years.
How Subchapter 5 Helps Small Businesses
With Subchapter 5, small businesses that have trouble paying their debt but are earning profit have an easier way of paying down their debt. When a business files for Subchapter 5 creditors have to accept the three-to-five-year repayment plans approved by the court. This includes being able to lower unsecured debt such as credit cards.
With Subchapter 5 you can continue to run your business as long as you are making the required payment plan.
If you are thinking about filing for any type of bankruptcy, make sure to consult with a qualified bankruptcy attorney.