You might have missed it amid all the goings-on since then, but in August 2019, a new law was passed that gives small businesses (and individuals/married couples) a new and simplified way to go through bankruptcy without needing to sell off their assets.
In other words, you can keep operating your business while going through and emerging from bankruptcy. And you can do it faster and cheaper than before.
The Small Business Reorganization Act added a new section to Chapter 11 of the U.S. Bankruptcy Code. Subchapter V lets entities with debts below a threshold amount go through a streamlined court process, establishing and approving new repayment plans that creditors are required to accept (creditors get input, too, but this is limited and more streamlined as well). You don’t have to sell off your assets as in a Chapter 7 bankruptcy, and you can keep operating without needing to meet the strict Chapter 13 requirements or suffering the prohibitive expense of a standard Chapter 11 process
Your business might be in dire straits, but weathering this rough patch might mean a return to profitability. If that’s the case, a Subchapter V bankruptcy is worth discussing with your lawyer.
Subchapter V Eligibility Requirements
Technically, any bankrupt entity has always been able to file for Chapter 11 bankruptcy. But a standard Chapter 11 process requires administrative fees to be paid upfront and involves a number of complexities that require careful attention from an attorney. This made Chapter 11 bankruptcies impossible for many small businesses and unattractive to many more. Traditionally, only large corporations have taken advantage of Chapter 11 protections.
The only other option for filing bankruptcy while keeping your business was Chapter 13, but there are income and debt requirements to be eligible for this type of proceeding.
Subchapter V extends the spirit that Chapter 11 was always supposed to embody, making a reorganization bankruptcy something any entity could achieve.
Under the express terms of the SBRA, if your business (or you as an individual/married couple) has debts that total less than $2,725,625, you can use the simplified Subchapter V process. This threshold was recently increased to $7,500,000 for the next year as part of the legislative response to the pandemic, and I believe there’s reason to hope the increase will be made permanent
In addition, at least half of your debt must be from “business activity” — a legal term that includes most debts small businesses typically incur.
Subchapter V also specifically excludes businesses that derive substantially all of their income from operating a single real property. Other than that, the only requirement for a Subchapter V is that your business is, in fact, bankrupt.
The Subchapter V Process
As with virtually all bankruptcy proceedings, the Subchapter V process starts when you file a petition with the relevant bankruptcy court — the court covering the address where your business is located (or where you file your personal taxes). From that moment on, most creditors have to stop collection efforts, and you aren’t required to make any payments until your bankruptcy plan has been approved.
You then have 90 days to file your bankruptcy plan with the court. This is a plan that you’ll ideally work out with your creditors — almost always with your lawyer and frequently your accountant’s help — and that the court will approve. If you can’t reach what the court feels is a realistic and equitable arrangement, it might impose a deal of its own.
Of course, one of the advantages of the bankruptcy process is that it incentivizes creditors to negotiate terms with you and to agree to a payment plan you’ll truly be able to manage. Otherwise, they risk getting nothing at all.
When your bankruptcy plan is approved, you make the required payments on the new schedule, typically over a period of three to five years.
Other Advantages of Subchapter V
My general recommendation is that small business owners keep their personal and business finances separate. There are a number of reasons for this, including the added complexities and risks of a business bankruptcy that involves personal assets or vice versa. (This isn’t the most significant factor in my recommendation to keep things separate, but it’s up there).
You can almost always save your primary residence when you file for personal bankruptcy, for example. But if you file a business bankruptcy and your primary residence is collateral on a business obligation, you might be forced to sell it or include it in asset calculations when making a repayment plan.
This and similar issues are also dealt with in Subchapter V, helping small business owners in these predicaments hang onto their homes and certain other personal assets while fully reorganizing their business debts. This is an enormous financial boost to small business owners and can also take a lot of the stress out of the bankruptcy process.
Before You File
Any individual or business owner facing an insurmountable debt issue ought to carefully consider their options. That consideration should include speaking with a bankruptcy lawyer and an accountant or two before choosing a course of action. There’s no need to rush and plenty of reasons to proceed with caution, so make sure you gather all the information you need before you move ahead.
All this to say, filing for bankruptcy is never an easy decision. The bankruptcy process is never exactly easy, either. But Subchapter V might make it a lot easier, and it has many advantages for small business owners who want to keep things running as they reorganize.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.