Timing Subchapter V And Entrepreneur Rescue

Individual chapter 11 reorganization cases often play a role in Entrepreneur Rescue.^[1] The Small Business Reorganization Act of 2019 (the “SBRA”) vitalized the process with Subchapter V. Subchapter V provides an expedited, simpler and less expensive route through chapter 11 of the Bankruptcy Code for small businesses and their owners.^[2]

As we’re often quoted, properly timing any bankruptcy case is essential. Poor timing can result in lost opportunities and higher risks. Properly timing a Subchapter V case is also essential. Mis-timing a Subchapter V case in the Entrepreneur Rescue process can result in ineligibility for Subchapter V and its benefits.

Subchapter V and Entrepreneur Rescue

Entrepreneur Rescue generally is initiated while the business is winding up. Liabilities are assessed. Non-exempt property is converted to exempt property. Loose ends from the prior endeavor are dealt with. A path forward is charted,

Once the business is wound up, its owner may be burdened with debt. A form of bankruptcy relief for the entrepreneur may be considered. If the business owner has assets, a chapter 11 reorganization may be a good strategy. If the business owner has assets and satisfies Subchapter V debt limits, a Subchapter V chapter 11 reorganization could be a better strategy.

Timing and a Subchapter V

This is where timing becomes tricky.

The Bankruptcy Code defines a “small business debtor” as “a person engaged in commercial or business activities.^[2]” Some bankruptcy courts interpret this as requiring individuals seeking Subchapter V to have an ongoing business, not as having commercial or business activities which ended before they filed for Subchapter V.

Thus, retirees with two closed pharmacies were inclinable for Subchapter V.^[3] Similarly, an individual who owned and managed defunct businesses was disqualified from being a Subchapter V debtor.^[3]

In contrast, some individuals with defunct businesses were deemed qualified for Subchapter V.^[4] The result may depend where the case is filed.

What This Means to You

It means that if:

a,) your business is failing;

b.) you’re considering closing it or selling it;

c.) you are personally responsible for the business’ debts (e.g. guaranties, sale taxes) or have other unmanageable debts; and

d.)  you have personal assets which may be exposed to creditors’ collection efforts;

you should talk to bankruptcy professional before you close or end your relationship with your business. Discuss appropriate strategies for closing your business and reorganizing yourself using Subchapter V’s benefits and other strategies. Otherwise, closing your business on your own can create new problems and reduce access to useful tools.

It’s like when you have a health issue. The sooner you seek professional help, the greater and better your options. This way you can close your business and preserve your access to Subchapter V’s benefits and other options at the same time.

Any questions? We’re here to answer them.

References