Small business bankruptcy: What do you need to know?

Last updated on June 22nd, 2022 at 03:59 pm

Co-authored by Tiffany Woelfel, Davis|Kuelthau

After the last two years, dealing with bankruptcy issues is probably the lowest priority on any business owner’s mind. Perhaps you have been able to survive the unprecedented market trends and uncertainty, and now times look to be stabilizing. Having a basic understanding of what’s been called “Sub 5”, or “Subchapter V” can help you navigate any surprises that may be coming ahead. If you have other questions about bankruptcy, you may consult a reliable bankruptcy attorney for more info.

Subchapter V history and background

On February 19, 2020, the Small Business Reorganization Act (“SBRA”) became effective and provided small businesses and owners, or individuals of high net worth, with a faster and more affordable pathway to reorganize- thus creating Subchapter V of Chapter 11. 

When SBRA was first enacted, there was a debt limit for debtors to qualify under this section. Subchapter V was limited to debtors with aggregate debts that did not exceed approximately $2.7 million. The debt limit was intended to ensure debtors using Subchapter V were truly small businesses and owners.

In March 2020, the debt limit was increased to $7.5 million as part of the CARES Act. This increase significantly broadened the number of eligible businesses. While bankruptcies broadly have been down over the past two years, Subchapter V filings in Wisconsin have increased by 42%.

Important tips about subchapter V

Be prepared to move quickly. Under Subchapter V, the debtor must file a proposed plan within 90 days. Creditors should pay attention to how the plan deals with different types of debts, how creditors are classified, intended payments under the plan and the length of time the plan calls for payments.  

Be ready to negotiate. Another purpose of Subchapter V was encouraging debtors to work with their creditors to propose a “consensual plan.” 

Advocate for yourself and pay attention. There is no creditor’s committee in Subchapter V. If you are the secured creditor, be ready to discuss the terms of your debt. If you are an unsecured creditor, plan to engage in discussions with the debtor early in the process to understand what will happen. 

Be aware of the debt limit for Subchapter Vs are and whether the debtor may be eligible. Any creditor could challenge the debtor’s eligibility to file.

Recent developments

Recent legislation has been introduced that could impact what happens next. On March 27, 2022, the CARES Act $7.5 million debt limit for Subchapter V expired returning the debt limit to just over $3 million.

Just before the expiration, Senator Grassley introduced the Bankruptcy Threshold Adjustment and Technical Corrections Act that seeks to make the $7.5 million debt limit permanent. On April 7, Senator Murphy introduced an amendment to make the $7.5 million debt limit effective for 2 years. The amended Act passed in the Senate on April 8, 2022. However, the Act must still pass in the House before becoming law.

If you are not familiar with Subchapter V, please consult a law office about your rights. Being mindful and informed about this section will put you in the best position to recover outstanding debts. If you have questions or are concerned this may affect you, please reach out to the Davis Kuelthau attorneys who authored this article.

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