The New Sub-Chapter V – Small Business Reorganization
Most small businesses facing a restructuring in bankruptcy opt for a sub-chapter V filing (called a sub-chapter 5). This sub-chapter was created specifically for small businesses. In essence, it allows a business to file for bankruptcy protection (halting all creditor action), lets the business keep operating, and ultimately provides a means to eliminate some portion of the business debt. This specific sub-chapter was created as a lifeline for the struggling small businesses, and is a particularly powerful tool.
1. Eliminate Debt. Arguably the most important part of this new law is the ability to eliminate certain debts without the owner losing the business. Because the goal of the law is to help small businesses restructure, the law allows an owner to keep ownership even if all the unsecured debts is eliminated.
2. No Creditor Committee. In the typical chapter 11 case, a creditors committee can be appointed to represent the interests of the unsecured creditors. The presence of such a committee can create substantial extra cost and difficulty in the case. In sub-chapter V however, such committees are virtually never appointed.
3. No Need for Consenting Class of Creditors. In a traditional chapter 11, the business owner would be required to obtain the affirmative consent of at least one class of creditors in order to “confirm” a proposed Chapter 11 Plan. In sub-chapter V however, there is no such requirement. A business owner could succeed in confirming a Plan, even in the face of unanimous creditor opposition.
4. Future Business Profits Determine What’s Paid To Creditors. In order to secure the significant benefits of a sub-chapter V filing, a business owner is required to devote some portion of future earnings toward the Chapter 11 Plan payments. It is the projected future earnings which typically determines how much the pool of unsecured creditors will be paid. In exchange for the commitment of future earnings, the small business owner can then eliminate the unpaid balance of those unsecured debts. If the confirmed Chapter 11 Plan requires only a 10% recovery to those creditors, then they are limited to only this recovery.
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