Small Business Relief With Subchapter V Bankruptcy

COVID-19 has impacted everyone in the United States, especially small businesses. In recognition of the hardships, revisions to the Subchapter V Bankruptcy policy have been put into place to help cushion things and perhaps save many of the nation’s businesses from closing forever.

 New Expansions to the Chapter V Bankruptcy

Within the Consolidated Appropriations Act, 2021 (CAA) new expansions were formed and authorized. Key factors focus on the reorganization of certain terms for distressed companies that fall under the Subchapter V of the Chapter 11 of the Bankruptcy Code. When a company can reorganize then they gain needed time to weigh the benefits of keeping or liquidating real property leases. They can even extend the leases using the reorganization plan.

Benefits include:

  • Small businesses can hold onto their equity interests but still just liquidate unsecured debt.
  • The filing business is the only one allowed to request reorganization.
  • The business can request to extend their payments over time by utilizing the reorganization plan.

Upcoming Changes- Time to Act Quickly

Despite the benefits that have been in place, things are slated to change which will impact most businesses. Many small businesses that would truly reap the benefits of reorganization will soon be unable to file under Subchapter V as of March 27, 2021. Any business that feels they will benefit from a Subchapter V reorganization should act immediately before mid-March or face a lowered debt limit that might leave them out in the cold and unable to use the beneficial reorganization.

Additional Subchapter V Benefits

The CAA has made Subchapter V beneficial due to reorganization. The benefits will remain usable for any cases filed prior to December 22, 2022.

Certain key aspects include:

Extra time on rental payments: With the CAA debtors can request an additional 60 days in addition to the initial first 60 days permitted (this makes a 120 day rental extension) for any business that has experienced hardship due to COVID-19. The debtor is allowed to  repay the deferred amount over the course of several years using the Subchapter V reorganization plan. The benefit can substantially help businesses who are experiencing cash flow problems.

Under the previous bankruptcy code, a debtor was given only 120 days to ‘assume or reject’ any commercial real estate lease. They were allowed only the option of seeking a 90 day extension from the court. However, with the CAA’s amendments, any Chapter 11 debtor-lessees are given 210 days to either assume or reject the leases. After the extended period, they can then request another 90 days from the court. The added time can be used in a variety of ways such as to renegotiate the terms of the existing lease.

Key Changes to the Bankruptcy Code

The CAA has taken things a step further by also amending Section 364. Debtors can apply for a Paycheck Protection Program (PPP) loan. However, this hinges on the actions of the Small Business Administration (SBA). Currently the SBA seems to be dragging their feet and has not indicated any steps to make the amendment available to Subchapter V borrowers.

If the SBA permits Subchapter V debtors to secure loans, the borrower will need the court’s approval. The court must consider the debtor’s request of a PPP loan within seven days. Any loan, even a PPP loan, that is not forgiven receives super priority exemption status. The debtor can then repay the loan over time under the Subchapter V reorganization plan.

Subchapter V Debt Qualification

Even businesses with a debt that exceeds 7.5 million can qualify for Subchapter V. Businesses such as restaurants and retail debtors which are pursuing a Subchapter V with a debt below the 7.5 million cap, but which have contingent debt such as leases and other contracts which make their actual claims over the 7.5 million cap are now able to meet the required qualifications. However, limits remain for Subchapter V, especially if a business owns single asset real estate or as a debt that exceeds 7.5 million.

Currently, hundreds of businesses have benefited from the advantages of Subchapter V. Debtors now have the leverage they need to reorganize their obligations. The entire process is far cheaper and streamlined than previously.

With greater flexibility and easier qualifications, Subchapter V has become a necessary tool for businesses hard-hit by the COVID-19 pandemic crisis. It is hoped that with these recent changes fewer businesses will be abandoned and forced to close their doors forever.

Please contact Oberhauser Law to learn more. When used Subchapter V has the potential to act as a lifesaver for businesses during these trying times. 978-452-1116


Attorney Gregory Oberhauser

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Gregory Oberhauser is the ONLY attorney in Massachusetts to be distinguished as an ACS-CHAL Forensic Lawyer-Scientist by the American Chemical Society!

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