New Relief for Small Business
Advantages of Electing Small Business Debtor Provisions under Subchapter V
There are several advantages to electing to proceed in Chapter 11The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.) Click for more: Chapter 11 Bankruptcy under Subchapter VSubchapter V allows small businesses and their owners to spread the repayment of some or all of their debt over 3 to 5 years, similar to a Chapter 13 reorganization for individuals. The excess debt that cannot be repaid by the plan payments is discharged at the end of the repayment period. Click for more: New Relief for Small Business - Subchapter V as a small business debtorA person who has filed a petition for relief under the Bankruptcy Code.. For instance, a Chapter 11 planA debtor’s detailed description of how the debtor proposes to pay creditors’ claims over a fixed period of time. for reorganization filed by a Subchapter V debtor is easier to confirm because, unlike “normal” Chapter 11 cases, only the debtor can file a proposed reorganization plan. Furthermore, a disclosure statementA written document prepared by the chapter 11 debtor or other plan proponent that is designed to provide "adequate information" to creditors to enable them to evaluate the chapter 11 plan of reorganization. is not required, a contested plan may be confirmed over an objecting impaired class, and the absolute priorityThe Bankruptcy Code’s statutory ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. For example, under the Bankruptcy Code’s priority scheme, money owed to the case trustee or for prepetition alimony and/or child support must be paid in full before any general unsecured debt (i.e. trade debt or credit card debt) is paid. rule does not apply.
The administrative fees in a Subchapter V reorganization are also less expensive because, unless the court orders otherwise, a creditors’ committee may not be appointed in a Subchapter V debtor case and Subchapter V debtors are not required to pay quarterly fees to the U.S. TrusteeAn officer of the Justice Department responsible for supervising the administration of bankruptcy cases, estates, and trustees; monitoring plans and disclosure statements; monitoring creditors’ committees; monitoring fee applications; and performing other statutory duties. Compare, bankruptcy administrator.. Subchapter V cases also proceed faster than traditional Chapter 11 cases because the debtor’s reorganization plan must be filed within 90 days after filing for bankruptcyA legal procedure for dealing with debt problems of individuals and businesses; specifically, a case filed under one of the chapters of title 11 of the United States Code (the Bankruptcy Code). Click for more: Bankruptcy Introduction Video protection and a third-party trusteeThe representative of the bankruptcy estate who exercises statutory powers, principally for the benefit of the unsecured creditors, under the general supervision of the court and the direct supervision of the U.S. trustee or bankruptcy administrator. The trustee is a private individual or corporation appointed in all chapter 7, chapter 12, and chapter 13 cases and some chapter 11 cases. The trustee’s responsibilities include reviewing the debtor’s petition and schedules and bringing actions against creditors or the debtor to recover property of the bankruptcy estate. In chapter 7, the trustee liquidates property of the estate, and makes distributions to creditors. Trustees in chapter 12 and 13 have similar duties to a chapter 7 trustee and the additional responsibilities of overseeing (similar to a Chapter 7The chapter of the Bankruptcy Code providing for "liquidation,"(i.e., the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors.) Click for more: Chapter 7 Bankruptcy or 13 trustee) is appointed to oversee the case to ensure orderly confirmationBankruptcy judges’s approval of a plan of reorganization or liquidation in chapter 11, or payment plan in chapter 12 or 13..
Qualifying as a Small Business Debtor
A small business debtor under Subchapter V is a person (including individuals, partnerships and corporate debtors) or affiliate debtor that is engaged in commercial or business activities (excluding persons whose primary activity is the business of owning single asset real estate) whose aggregate noncontingent liquidated secured and unsecured debts as of the date of filing of the petition do not exceed $7,500,000 (excluding debts owed affiliates or insiders) not less than 50% of which arose from the commercial or business activities of the debtor.
Powers and Duties of Subchapter V Debtor
A Subchapter V debtor has all of the powers of a trustee serving in a case under Chapter 11. A Subchapter V debtor is authorized to operate its business during the case. It has the power to use, sell or lease estate property in the ordinary course of business without court approval and may use, sell or lease estate property outside the ordinary course of business with court approval. A Subchapter V debtor may use a creditor’s cash collateral to operate the business. “Cash collateral” is cash, deposits, accounts receivables, or other cash equivalents on which a creditorOne to whom the debtor owes money or who claims to be owed money by the debtor. has a lienThe right to take and hold or sell the property of a debtor as security or payment for a debt or duty. Click for more: Lein Strip. A Subchapter V debtor also has the power to obtain unsecured and secured credit and employ attorneys, accountants, appraisers, auctioneers, real estate brokers and other professionals to represent or assist the debtor in performing its duties during the Chapter 11 case, even if that professional holds a prepetition claimA creditor’s assertion of a right to payment from the debtor or the debtor’s property. of less than $10,000.
As mentioned above, a Subchapter V debtor has the exclusive right to file a plan for reorganization in a small business debtor case, but the plan must generally be filed no later than 90 days after filing the bankruptcy petitionThe document filed by the debtor (in a voluntary case) or by creditors (in an involuntary case) by which opens the bankruptcy case. (There are official forms for bankruptcy petitions.). A Subchapter V debtor may reject, assumeAn agreement to continue performing duties under a contract or lease., or assume and assign to a third-party executory contracts and unexpired leases. A Subchapter V debtor has the power to object to improper claims and to file proofs of claim on behalf of creditors. A Subchapter V debtor also has avoidance and recovery powers to (1) recover preferential transfers from the entity that received the transferAny mode or means by which a debtor disposes of or parts with his/her property., (2) set aside fraudulent conveyances and recover the funds, (3) avoid certain kinds of transactions and statutory liens pursuant to the Code’s “strong arm” avoiding powers, (4) demand turnover of estate property, including estate property held by state court-appointed receivers, (5) set aside or avoid certain post-petition transfers, (6) recover improper setoffs, (7) “surcharge” a secured creditor’s collateral for the necessary costs and expenses of preserving or disposing of that collateral to the extent the secured creditorA creditor holding a claim against the debtor who has the right to take and hold or sell certain property of the debtor in satisfaction of some or all of the claim. benefited, and (8) prevent utility companies from altering, refusing or discontinuing service to a Subchapter V debtor for unpaid prepetition utility bills, or discriminating against a debtor due to the bankruptcy filing.
Subchapter V debtors are given most of the duties of a Chapter 11 Trustee, including, (1) accounting for all property received in connection with the Chapter 11 case, (2) furnishing information concerning the estate and its administration as requested by parties in interest, and (3) filing information with the court, the U.S. Trustee and relevant taxing authorities.
A Subchapter V debtor must attend (through its senior management personnel) meetings scheduled by the court or the U.S. Trustee, including initial debtor interviews, scheduling conferences and § 341(a) meetings. All taxes entitled to administrative priority must be timely paid, and a Subchapter V debtor must maintain insurance customary and appropriate to the industry. All unfiled tax returns for any prepetition years must be filed by the debtor.
Subchapter V Debtor Reporting Requirements
In addition to the regular duties of a small business debtor in a Chapter 11, a Subchapter V debtor must satisfy certain reporting requirements, including providing its most recent balance sheet, a statement of operations, cash-flow statements, federal income tax return, and all schedulesDetailed lists filed by the debtor along with (or shortly after filing) the petition showing the debtor’s assets, liabilities, and other financial information. (There are official forms a debtor must use.) and statements of affairs. After commencement of the bankruptcy, a Subchapter V debtor must file post-petition financial reports, tax returns, and file a monthly operating report containing specified information, such as the debtor’s profitability, reasonable approximations of the debtor’s projected cash receipts and cash disbursements over a reasonable period, and comparisons of actual cash receipts and disbursements with projections in prior reports.
General Overview of Subchapter V Proceedings
As mention above, a disinterested third-person will be appointed to serve as trustee in the Subchapter V case. A trustee is appointed to oversee the estate and case proceedings and has similar powers and duties as the debtor, such as (1) account for property received by the estate, (2) examine/object to improper claims, (3) oppose a debtor’s dischargeA release of a debtor from personal liability for certain dischargeable debts set forth in the Bankruptcy Code. (A discharge releases a debtor from personal liability for certain debts known as dischargeable debts and prevents the creditors owed those debts from taking any action against the debtor to collect the debts. The discharge also prohibits creditors from communicating with the debtor regarding the debt, including telephone calls, letters, and personal contact.) Click for more: The Discharge Video if appropriate, (4) respond to inquiries, (5) submit final report and account, (6) investigate a debtor’s financial condition, and (7) ensure a debtor makes plan payments. A Subchapter V debtor pays its plan payments to the trustee. Payments and funds received by the trustee are retained by the trustee until plan confirmation. If the plan is confirmed, the trustee will distribute any such payment in accordance with the plan. If the Subchapter V debtor’s plan is confirmed, the trustee’s appointment in the case will terminate when the plan has been substantially concluded.
No later than 60 days after filing for bankruptcy protection, the court will hold a status conference to further the prompt and economic resolution of the case. No later than 14 days before the date of the status conference, the Subchapter V debtor must file with the court a report detailing the efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization.
A debtor must also attend an initial interview with the trustee. At the initial small business caseA special type of chapter 11 case in which there is no creditors’ committee (or the creditors’ committee is deemed inactive by the court) and in which the debtor is subject to more oversight by the U.S. trustee than other chapter 11 debtors. The Bankruptcy Code contains certain provisions designed to reduce the time a small business debtor is in bankruptcy. Click for more: Subchapter V Small Business Reorganization interview, the trustee will investigate the debtor’s viability, inquire about the debtor’s business plan, explain the debtor’s obligations to file monthly operating reports and other required reports, attempt to develop an agreed scheduling order, and inform the debtor of other obligations.
A Subchapter V debtor must file a Chapter 11 plan for reorganization no later than 90 days after filing its voluntary petition. A Subchapter V debtor’s plan must contain the following: (1) a brief history of the debtor’s business operations, (2) a liquidationA sale of a debtor’s property with the proceeds to be used for the benefit of creditors. analysis, (3) projections with respect to the ability of the debtor to make payments under the proposed plan, (4) submission of all or a portion of the debtor’s post-petition income from future earnings to the supervision and control of the trustee as is necessary for the execution of the plan, and (5) provide appropriate remedies, which may include liquidation of nonexempt assets, to protect the holders of claims or interests in the event plan payments are not made.
Aside from the mandatory provisions, a Subchapter V debtor’s plan may contain any additional provisions that are consistent with the Bankruptcy CodeThe informal name for title 11 of the United States Code (11 U.S.C. §§ 101-1330), the federal bankruptcy law. Click for more: Bankruptcy Introduction Video, such as modifying the rights of a holder of a claim secured by the principal residence of the debtor if the new value received in connection with the granting of the security interest was not used to acquire the real property and was used primarily in connection with the debtor’s small business. This “lien stripping” is prohibited in “regular” individual Chapter 11 plans. Another benefit of the Subchapter V election is the ability to pay certain post-petition administrative expenses under plan. Under “normal” Chapter 11 rules, post-petition administrative claims must be paid in full in cash on the plan’s effective date. Subchapter V allows for a plan to provide for payment of trustee fees and “gap” claims through the plan.
Additional benefits of Subchapter V election are that a disclosure statement is not required in a small business debtor case, unless the court orders otherwise, and there is no specified confirmation deadline.
In order to confirm a plan for reorganization, a Subchapter V debtor must satisfy certain plan confirmation requirements. For a consensual plan where all parties agree to the terms of a proposed plan, the court will confirm a Subchapter V debtor plan that meets the same confirmation standards applicable to reorganization plans in “normal” Chapter 11 cases. When a proposed plan is contested by a creditor, the court will still confirm a debtor’s plan as long as the proposed plan (1) does not discriminate unfairly and (2) is fair and equitable to each class of claims or interests that is impaired under, and has not accepted, the plan. This is because under Subchapter V, unlike a “normal” Chapter 11, a plan need not provide that all classes of creditors vote to accept the plan or not be impaired by the plan. Nor must it require at least one impaired class accept the plan. A proposed plan for reorganization under Subchapter V isn’t required to pay unsecured creditors in full and the “absolute priority rule” requiring a nonconsenting class of creditors or interest holders to be compensated in full before any junior class may receive or retain property under the plan does not apply, thereby making it more likely that a contested plan will be confirmed by the court.
A Subchapter V debtor’s plan is “fair and equitable” as long as all of the following requirements are met.
- As to secured claims, the plan must provide one of the following options: (1) the secured creditor retains its lien on the property (collateral) and receives deferred payments until paid in full; (2) the property is sold free and clear of liens, with the creditor’s lien to attach to the sale proceeds; or (3) the secured creditor is provided with the “indubitable equivalent” of its claim.
- The proposed plan must also provide that all of the debtor’s projected disposable income to be received in the 3-year period (or such longer period not to exceed 5 years) will be applied to make payments under the plan or the value of the property to be distributed under the plan period is not less than the debtor’s projected disposable income. “Disposable income” is income that is received by the debtor and that is not reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor, or a post-petition domestic support obligation, or the payment of expenditures necessary for the continuation, preservation, or operation of the debtor’s business.
- The proposed payments under the plan must also be feasible, meaning the debtor will be able to make all payments under the plan or there is a “reasonable likelihood” the debtor will be able to make all payments under the plan. The plan must also provide remedies, which may include liquidation of nonexempt assets, to protect the holders of claims or interests in the event plan payments are not made.
For more information regarding Subchapter V reorganizations, click here.
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