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Subchapter V Small Business Reorganization

by | May 4, 2020

Subchapter V Small Business Reorganization
Subchapter 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.

A Subchapter V reorganization is ideal for businesses and their owners in the following circumstances:

  1. An individual whose business is failing or has failed and has high business debt that is personally guaranteed, but has income from another source.
  2. Small businesses that operate multiple locations and want to close some of the locations.
  3. Business owners who used the equity in their home to fund their business. The debtor may “cram down” or modify the junior mortgage (such as a HELOC) by proposing a lower interest rate or extending its maturity date as long as, 1) the loan was obtained after the home was purchased, 2) the home value is less than the total debt secured by the home, and 3) the funds from the junior loan were used in connection with business,.
  4. Companies that are able to remain cash flow positive after the elimination or reduction of certain debts.
  5. Even a midsize business with over 100 employees and $20 million in annual revenue that is subject to $150 million in litigation claims (contingent), can benefit from a Subchapter V reorganization as long as its noncontingent and unliquidated claims (e.g., trade and funded debt claims) total less than $7.5 million.
  6. Businesses that expect to incur large amounts of post-petition, preconfirmation trade credit from vendors that provide goods and services to it (which are considered admin. claims) that now can be paid back over the life of the plan.
  7. And, of course, sole proprietorships.

Carpentry business

A small business debtor under Subchapter V is a person (including individuals, partnerships and corporate debtors) and its owners and affiliates that are 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) with at least half of that debt arising from the commercial or business activities of the debtor.
For more information call our experienced bankruptcy attorneys or click here to read a more in-depth description of Subchapter V.
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