Continuing Education-2023 Guide to Small Business Bankruptcy
We’re looking forward to presenting at National Business Institute’s upcoming course, “A 2023 Guide to Small Business Bankruptcy” on Tuesday, January 10, 2023.
Register today at https://www.nbi-sems.com/ProductDetails/96001ER! Use Promo Code FSPN50 at checkout to get $50 off, hope to see you there.
If you have any questions about Business Bankruptcy or Commercial Litigation, contact Attorney Amann at wamann@amburlaw.com or Attorney Burnett at jburnett@amburlaw.com or call Amann Burnett, PLLC at 603-696-5401.
- Subchapter V
The Small Business Case and Small Business Debtors
The Bankruptcy Code allows small business debtors to file for relief under two different special categories of chapter 11 intended to streamline processes and reduce costs. The first, referred to as a small business case (by definition in 11 U.S.C. § 101(51C)), was created in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), and the second, referred to as subchapter V, was created in 2019 by the Small Business Reorganization Act (SBRA). A debtor may elect either of these two options based on certain eligibility criteria. Both small business and subchapter V cases are treated differently than a traditional chapter 11 case primarily due to accelerated deadlines and the speed with which the plan is confirmed. The two types of cases have different debt limits, defined as the total amount of noncontingent liquidated secured and unsecured debt at the time the debtor files their bankruptcy case.
In order to file a small business case, the debtor must be engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with total secured and unsecured debts of $3,024,725 or less, not less than 50 percent of which arose from the commercial or business activities of the debtor. In order to file a subchapter V case, the debtor must be engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with combined total secured and unsecured debts of $7,500,000 or less, not less than 50 percent of which arose from the commercial or business activities of the debtor. For both types of small business cases the combined total of secured and unsecured debts must be owed as of the date of filing for bankruptcy relief.
In addition to accelerated deadlines and faster plan confirmation, small business and subchapter V cases have other key differences from ordinary chapter 11 cases: a creditors’ committee is not automatically appointed and instead will only be appointed upon a showing of cause, 11 U.S.C. § 1102(a)(3), and the debtor or debtor in possession has additional duties, 11 U.S.C. § 1116.
In both small business cases and subchapter V cases, the debtor must, among other things, attach its most recent balance sheet, statement of operations, cash-flow statement and Federal income tax return to the petition, or provide a statement under oath explaining the absence of such documents, and must attend meetings scheduled by the court or the U.S. trustee through senior management personnel and counsel. The debtor must make ongoing filings with the court concerning its profitability and projected cash receipts and disbursements and must report whether it is in compliance with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure and whether it has paid its taxes and filed its tax returns. 11 U.S.C. §§ 308, 1116, 1187.
In contrast to subchapter V and other chapter 11 debtors, debtors in small business cases are subject to additional oversight by the U.S. trustee. Early in the case, the debtor must attend an “initial debtor interview” with the U.S. trustee at which time the U.S. trustee will evaluate the debtor’s viability, inquire about the debtor’s business plan, and explain certain debtor obligations including the debtor’s responsibility to file various reports. 28 U.S.C. § 586(a)(7). The U.S. trustee will also monitor the activities of the debtor during the case to identify as promptly as possible whether the debtor will be unable to confirm a plan.
In a subchapter V case, a trustee will be appointed to administer the debtor’s estate and oversee its reorganization. The trustee’s role in a subchapter V case is similar to that of a chapter 12 or 13 trustee: facilitating the development of and overseeing the debtor’s plan of reorganization; appearing at major hearings; investigate the debtor’s conduct, assets and liabilities, financial condition, and the operation of the debtor’s business as a going concern; and ensuring that payments are made under the plan. 11 U.S.C. § 1183. The U.S. trustee has the same oversight responsibilities as ordinary chapter 11 cases. 28 U.S.C. § 586.
Because certain filing deadlines are different and extensions are more difficult to obtain, a small business case normally proceeds more quickly than other chapter 11 cases. In a small business case, only the debtor may file a plan during the first 180 days after the case is filed. 11 U.S.C. § 1121(e). This “exclusivity period” may be extended by the court, but only to 300 days, and only if the debtor demonstrates by a preponderance of the evidence that the court will confirm a plan within a reasonable period of time. In a subchapter V small business case, only the debtor may file a plan. 11 U.S.C. § 1189. In other chapter 11 cases, however, the court may extend the exclusivity period “for cause” up to 18 months. Another example of the faster pace of small business and subchapter V cases is that the debtor may not need to file a separate disclosure statement if the court determines that adequate information is contained in the plan. 11 U.S.C. §§ 1125(f), 1181, 1187. In a traditional chapter 11 case, the debtor must file a separate disclosure statement. 11 U.S.C. § 1125.
Subchapter V cases go beyond other chapter 11 and small business cases by allowing for relaxed plan confirmation requirements. Plans can be confirmed as long as they do not discriminate unfairly, are fair and equitable with respect to each class of claims or interests, provide that all projected disposable income of the debtor (or equivalent value) is paid into the plan for a three- to five-year period. 11 U.S.C. § 1191.
