Small businesses adopting subchapter V bankruptcies

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Many small businesses are using a niche portion of the Bankruptcy Act to pay off debts amid COVID-19 crisis, and bankruptcy experts are encouraging other struggling small businesses to consider the option instead of closing completely.

About 1,000 small businesses filed for Subchapter V, Reorganization of Small Business Debtors, in 2020, according to statistics cited today at a session of the American Bankruptcy Insolvency 2020 conference. Institute.

Part of the reason could be the improvement of subchapter V of the Coronavirus Aid, Relief and Economic Security Act (CARES). CARES has temporarily raised the limit on a filer’s aggregate secured and unsecured unconditional and liquidated debt to $ 7.5 million from $ 2.7 million. The higher debt limit is expected to end on March 27, 2021.

“[Subchapter V] is tailor-made for the small businesses that can survive COVID and come out on the other side, ”said Deirdre O’Connor, CEO of Epiq Global.

A Subchapter V filing has many advantages over a Chapter 11. First, in Chapter V, a creditors committee is not formed and, therefore, the debtor’s bankruptcy estate does not bear the costs of the debtors. committee professionals. A creditors committee has significant power in a Chapter 11 matter and is at odds with secured creditors, significantly hampering the reorganization process.

Second, the absolute priority rule does not apply. Thus, a debtor can retain its interest even if the unsecured creditors do not receive full payment. In a typical Chapter 11, the debtor cannot retain its equity unless (1) the creditors vote in its favor and (2) the holder of the equity security “adds value”. In many Chapter 11 cases, the owner loses equity and ownership in the business.

The bankruptcy bar and the courts expect more such cases to be filed in 2020 as the paycheck protection program funds run out. US courts have hired 250 new subchapter V administrators.

Third, in a subchapter V, the management of the small business can remain with the debtor.

And, fourth, subchapter V gives the small business debtor the option of paying administrative claims during the life of the plan rather than in cash on the effective date of bankruptcy.

The bankruptcy bar and the courts expect more such cases to be filed in 2020 as the paycheck protection program funds run out. US courts have hired 250 new subchapter V administrators.

In other bankruptcy trends, data from Reorg.com cited in the session showed that 2020 has been rich in Chapter 11 cases. The second quarter saw 138 cases and the third quarter saw 133 cases. (The quarterly average since 2016 was 97 cases.)

The months of June and July saw more than 50 cases each, but deposits slowed in August and September. However, October looks a lot busier, according to Jessica Steinhagen, legal analyst at Reorg.

ABI, top priority, chapter 11, Reorg, Subchapter V, The CARES Law

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