Subchapter V a part (or “subchapter”) of the Small Business Reorganization Act of 2019, which took effect in February 2020. It amends Chapter 11 of the Bankruptcy Code, and therefore Chapter 11 Bankruptcy law. Specifically, it:
- Allows certain businesses with debts of less than $2,725,625 to file for a streamlined version of Chapter 11 Bankruptcy (with the aim of making small business bankruptcy faster, cheaper, and more accessible).
- Appoints a standing trustee
- Gives debtors the full power to propose a reorganization plan (which must be filed within 90 days of the petition filing)
- Lifts the requirement for an unsecured creditor’s committee (unless the court orders one)
- Lifts the requirement of new value being given to debt (which was used by the equity holders to retain their equity interest without paying creditors in full)
- Allows the modification of certain types of residential mortgages if the underlying loan wasn’t used to buy the house and was instead used primarily for business.
Very soon thereafter, the COVID-19 crisis began, and on March 27th, 2020, the CARES (Coronavirus Aid Relief and Economic Security) Act was passed. This made further temporary amendments to Subchapter V, including allowing businesses with debts of up to $7.5 million to file (so long as at least 50% of the debt came from commercial or business activities.
Since then, certain individual debtors have begun using Subchapter V to restructure their personal guaranties of defunct business debts. Bankruptcy courts have examined these applications of Chapter V and found that personal guaranties count as business debt, and individuals who have the requisite percentage of business debt (at least 50%) qualify for Subchapter V as small business debtors.
On December 27th, 2020, further temporary amendments were made to the Bankruptcy Code with the Consolidated Appropriations Act (CAA). These include:
- Explicitly allowing Subchapter V debtors to apply for Paycheck Protection Program (PPP) loans
- Allowing the court to extend Subchapter V debtors’ time to perform with a valid non-residential lease for up to 120 days from the petition date (if the debtor has experienced hardship due to COVID-19)
- Extending the deadline for all debtor-tenants (including Subchapter V debtors) to assume or reject a non-residential property lease by 90-210 days from the petition date. This is in addition to a pre-existing extension clause of 90 days, meaning a debtor could potentially have as many as 300 days to decide whether to assume or reject a lease.
Both the CARES Act and the CAA are temporary measures that are set to expire (along with all associated amendments of Subchapter V) on March 27th, 2022 and December 27th, 2022 respectively.
In the meantime, Subchapter V (and the CARES Act and CAA amendments to it) provides new opportunities for small business to restructure their debt. However, these opportunities can be somewhat complex to navigate as a layperson, and it’s easy to get lost in terminology and potentially miss a windfall opportunity for you or your small business. This is why you should consult an experienced, knowledgeable bankruptcy attorney, who can explain the ins and outs of Subchapter V and all of the COVID-19 reorganization opportunities, and help you find the path forward that is best for you. NYC Bankruptcy Attorney Wayne Greenwald is here to help. Call Attorney Greenwald for a free consultation today at (212) 739-7599.