Subchapter V Bankruptcy has taken effect as of February 18, 2020

About Subchapter V Bankruptcy:Bringing Forth A New Subchapter for Small Businesses

The Small Business Reorganization Act of 2019:An analysis of the new legislative H.R. 3311 Act enacted by CongressFollowing the amendments made to the Bankruptcy code in 2005, small business debtors have continued to struggle amidst economic turmoil and persistent predatory lending practices that plagued their efforts to reorganize under Chapter 11 of the Bankruptcy Code. Finally after an outcry of from small business debtors to further amend the bankruptcy code on August 23, 2019 the Small Business Reorganization Act of 2019 was signed into law. In an effort to lower costs, and increase the speed of which Chapter 11 cases under the Bankruptcy code proceed, a new subchapter of Chapter 11 dubbed the Subchapter V was created that would apply solely to small business debtors with less than $2,725,625 taking into account certain exceptions of secured and unsecured debts.

Click here for the full H.R.3311 Act

What The Small Business Reorganization Act of 2019 Entails:

Facilitated Reorganization Process

The Subchapter V act looks towards the removal of procedural structure stopgaps that cause a burden by inflating the costs for small business debtors. This in effect makes reorganization for small business debtors more affordable by reducing the costs instead of excessive procedures. Subchapter V major changes include: small business debtors would no longer have to negotiate with creditors and relent to their demands during the vote soliciting process. Meaning that for Subchapter V debtors to confirm a plan or the approval of a separate Disclosure Statement, creditors would no longer have a role and would no longer be a roadblock. More importantly only the debtor would be able to propose a plan of reorganization. The act also removes the requirement that the debtor be responsible for paying administrative expense claims immediately and instead can now pay them over the time span of the plan.

Discharge Limitations

The Subchapter V act changes the limited exceptions to discharge as defined in section 1141. Instead the exceptions available to small business owners under Subchapter V are now applicable under Section 523(a) of the Bankruptcy code. The discharge would now relieve the debtor of personal liability for all debts in the plan except for: 1) on which the last payment is due after the first 3 years of the plan or as other time as fixed by the court (not to exceed five years) or 2) non-dischargeable debt. 

Appointment of a Subchapter V Trustee 

Chapter 11 Debtors would normally be their own trustees and be burdened with managing their own estate but with the subchapter 5 changes a trustee would be appointed. Similar to a Chapter 12 case under the Bankruptcy code, a trustee would be appointed to manage and facilitate the small business debtor's reorganization as well as to make sure that the debtor follows the reorganization exactly as it was presented in The Plan. 

Removal of New Value Rule 

The new Subchapter V provision removes the New Value Rule which required that any equity holders of the small business debtor provide "new value" to be able to retain equity interest. With the change in the New Value Rule, the equity holder will be able to retain their equity interest in the debtor without being forced to pay creditors off in full. The act changes the way plan confirmation used to work now requiring only that the plan is fair and impartial to the creditors. The act also takes a page from how Chapter 13 cases under the bankruptcy code function in that the debtor's projected disposable income will now be used to apply payments under the plan or the value of property to be distributed under the plan is not less than that the projected disposable income. 

Allowance of Modifications for Residential Mortgages 

Before the Subchapter V act individual business debtors were not allowed to modify their residential mortgages. That is no longer the case when the new Subchapter V act takes effect as mortgages secured by a residence can now be modified if the underlying loan was not used to obtain the residence as long as it is used mostly in connection to the debtor’s small business.


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