Can Small Businesses Obtain Relief Through Chapter 5 Bankruptcy?

 Posted on September 17, 2021 in Bankruptcy for Small Business Owners

There are many situations where businesses may have trouble paying debts and meeting other financial obligations while continuing to operate. In some cases, a business may seek to reorganize its operations and pay off as much of its debts as possible by pursuing Chapter 11 bankruptcy. However, this can be a long and involved process, and many small businesses may not have the resources to complete this type of reorganization while meeting all reporting requirements and paying the related costs. Fortunately, a recent change to the law has allowed some businesses to complete a Chapter 11 bankruptcy through a process that is faster and more efficient.

Small Business Debtor Reorganization

The Small Business Reorganization Act, which went into effect in 2020, created new procedures for a Chapter 11 bankruptcy. Because these procedures are outlined in Subchapter V of Chapter 11 of the U.S. Bankruptcy Code, this type of bankruptcy is often referred to as a “Chapter 5” case. Initially, Chapter 5 bankruptcy was available for businesses with aggregate debts up to around $2.7 million. However, the CARES Act of 2020, which provided relief for Americans affected by the COVID-19 pandemic, increased the qualifying amount of debt to $7.5 million.

One of the primary differences between a Chapter 5 bankruptcy and other Chapter 11 bankruptcy cases is that a creditors’ committee will not be created in a Chapter 5 case. A debtor’s plan for the reorganization of their business will not need to be approved by creditors. However, a business’s plan for reorganization must include information about the history of the business, an analysis that details payments that could be made to creditors in a potential liquidation of the business’s assets, and the amount of the expected payments that will be made to creditors under the plan. A bankruptcy court will generally confirm a reorganization plan if it treats creditors fairly and equitably, and creditors must receive an amount equal to or greater than what they would be able to recover in a Chapter 7 bankruptcy.

Under a Chapter 5 bankruptcy, a business may be able to create a repayment plan that functions similarly to what would be created during a Chapter 13 consumer bankruptcy. All of the debtor’s disposable income must be applied toward making payments to the business’s creditors, and payments may be made for at least three years but no more than five years. Generally, this type of plan will be approved if it is fair and equitable to all creditors based on the classes of their claims and if the debtor will be reasonably likely to be able to make all payments under the plan. The plan must also detail remedies available to creditors if the debtor does not make the required payments, and these remedies may include the liquidation of the debtor’s assets.

Contact Our San Antonio Business Bankruptcy Attorney

The Law Offices of Chance M. McGhee provides representation for debtors in business and consumer bankruptcies. We can help you determine whether your business qualifies for a Chapter 5 reorganization or repayment plan, and we will work with you to complete all requirements when filing for bankruptcy. Contact our Schertz, TX Chapter 5 bankruptcy lawyer at 210-342-3400 for a free consultation.

Sources:

https://www.law.cornell.edu/uscode/text/11/chapter-11/subchapter-V

https://rcbizjournal.com/2020/03/23/new-bankruptcy-law-could-be-a-blessing-in-upcoming-economic-blizzard/