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On August 1, 2019, the Small Business Reorganization Act of 2019, (SBRA) was passed into law and was signed by the president on August 23, 2019, and went effective on February 19, 2020. The Small Business Reorganization Act (SBRA) creates a new Subchapter V of Chapter 11 for the “reorganization of small business debtors”. It grants the business to go on while restructuring debt and making a plan to pay off creditors over time. It doesn’t mean that it will replace Chapter 11 provisions regarding small business debtors but instead, it creates an alternative procedure that small business debtors may choose to use. Proceedings under this subchapter will be called “Cases under Subchapter V of Chapter 11.”
SUBCHAPTER V ELIGIBILITY
Originally, small business debtors or individuals who have $2,725,625.00 (secured and unsecured) debts are eligible to proceed under Subchapter V of Chapter 11. But since the Covid 19 pandemic occurred, on March 27, 2020, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) which increased the debt limit to $ 7.5 million (both secured and unsecured) within a year, and it will end on March 27, 2021. So to be eligible in Subchapter V of Chapter 11, small business debtors or individuals, need to have debts less than $7.5 million (both secured and unsecured). Additionally, debtors must be engaged in commercial or business activities, at least half of their debts must be due to business activity, and the principal activity is not a single-asset of real estate operation.
This subchapter V, with the extension of its eligibility requirements under the CARES Act, may give a helpful tool to help many small businesses or individuals to survive.
Exclusively, an individual debtor is the one who may file a plan in Subchapter V. Therefore, no period of exclusivity expires after 120 days as in a normal Chapter 11 case or 180 days in the case of a traditional small business. Under Subchapter V, the debtors allow spanning their unsecured debt for 3 to 5 years. At this time, the debtor must assign his disposable income towards his debt. This may usually help both parties involved. Debtors have time to pay off their debts and can spread them over a longer time to avoid large sums of money. Creditors will benefit because there is less chance that debtors default on long-term payments.
LESSEN ADMINISTRATIVE FEE
In this case, there is no U.S. trustee fee. Hence, the cost of a debtor decreases. Moreover, if the court of the bankruptcy directs that a committee of creditors may not be assigned to a Subchapter V case and the individual debtor shall not pay the costs of such committee. These changes will result in fast-moving and inexpensive reorganizations for small businesses.
EASIER RETENTION OF COUNSEL
In a traditional Chapter 11 case, the court will not approve the retention of a debtor’s counsel if they owe some amount for prebankruptcy aid. This chapter has a special rule and it allows the retention of counsel as far as the prepetition fees don’t exceed $10,000.00. Thus, attorneys who provide services to an individual can still represent the individual in the case of bankruptcy even if some fees are owed when the Subchapter V case is filed. So, attorneys who provide services to an individual debtor can still represent the individual in the case of bankruptcy even if some fees are owed when the Subchapter V case is filed.
MODIFICATION OF CERTAIN MORTGAGES ON PRINCIPAL RESIDENCE
Restrictions on the modification of a mortgage on the debtor’s residence are amended by Subchapter V to enable the debtor to modify such claims when the proceeds of the associated mortgage are used particularly in bearing with the small business of debtors. Although most creditors typically purchase interest on the security of money and are still prohibited from modification, this unique provision in Subchapter V would allow for a mortgage modification if the individual debtor had used most of the home value of the debtor to finance the operation of the business.
LIMITED POST CONFIRMATION PLAN MODIFICATIONS
Only the debtor may change a plan after confirmation in Subchapter V.
This is a unique advantage because section 1127 (e) allows the trustee, U.S. trustee, or owner of a permitted unsecured claim to seek a modification to expand the number of payments or increase or decrease the time for payment in a normal individual case of Chapter 11. Limiting plan modification to the debtor only excludes these parties from the threat of adding plan payments when the debtor’s performance becomes more favorable than expected to validate the plan. Nevertheless, if the debtor’s disclosures are too generous, the debtor has the power to seek a modification to reduce plan payments in a Subchapter V case. This right to modification will expire to “substantial completion” when the plan is a consensual plan approved under section 1191 (a) but may be made at any time after confirmation when the plan is approved against the objection of a class of unsecured creditors according to section 1191 (b).
PAYING ADMINISTRATIVE EXPENSES OVER TERM OF PLAN.
Subchapter V allows the debtor to pay administrative costs throughout the life of the plan, provided the plan is approved under the cramdown provisions of section 1191 (b). A confirmed consensual plan must give the settlement for administrative costs on the effective date of the plan.
ATTAINABLE EARLY DISCHARGE
Subchapter V permits an individual to get a discharge on the plan’s effective date, on the condition that the plan is consensual. With a cramdown plan approved, the debtor’s discharge will not occur until plan payments are completed. This last condition is similar to the release provided in the Chapter 11 case, however, with the exceptions to the release of certain debts under section 523, which continue to apply to the individual debtor in Subchapter V.
NO LIMITATION ON CRAMDOWN OF CAR LOANS.
Subchapter V excludes the requirements of section 1325 (a) requiring a Chapter 13 debtor to repay the full amount of a personal motor vehicle loan experience within 910 days before the submission of bankruptcy rather than the amount of that collateral normally required for a secured claim under section 506 (b). This means that the individual debtor in a Subchapter V case will compel the vehicle creditor to take payments matching the value of the vehicle even if the amount is less than the full amount of the vehicle loan.
GREATER PROTECTION OF THE AUTOMATIC STAY.
Subchapter V does not discuss automatic retention exceptions that apply to a “small business case” filed within two years after confirmation or removal of a previous small business case. Hence, an individual debtor in a Subchapter V case may file a second case within two years from the previous case and remain in the actions of the creditors pursuing the debtor.
Although there are many benefits in Subchapter V for individual debtors, there are certain downsides that an individual should consider before heading down this path. It is better if you consult an experienced attorney to guide you in this step.
LIMITATIONS ON ELIGIBILITY
As discussed earlier, there is maximum debt for individuals seeking to take advantage of Subchapter V, and that is no less than 50 percent of the debts must arise from the debtor’s commercial or business activities. Moreover, the debtor must engage in commercial or business activities. At least one court has ruled that an individual debtor met this requirement because “he or she was addressing the outstanding business debt” that came from his or her indebtedness, which is held tightly by the companies.
APPOINTMENT OF SUBCHAPTER V TRUSTEE.
Each case of Subchapter V requires the designation of a trustee. It does not require the debtor to provide operations to the trustee because the duties of the trustee are similar to the trustee under Chapter 12. The Subchapter V trustee has the primary duty to assist the debtor in proposing and confirming a plan as well as distributing under the plan. The debtor shall be liable for Subchapter V trustee fees. When the debtor proposes a consensual plan, the trustee may be removed from substantial completion of the plan, which generally occurs on or about the effective date of the plan when the repayment is initiated with the creditors. In a non-consensual plan, the trustee is in charge of making plan distributions to creditors until the plan is completed. At that point, the trustee will submit the accounting and a final report.
PLAN DEADLINES AND OTHER OBLIGATORY PROCEDURES
Subchapter V is easier than in the Chapter 11 case. The debtors don’t need to file a disclosure statement and must file a consensual plan within 90 days from its filing of a bankruptcy petition. Furthermore, the court will hold a status conference within 60 days after the relief order, and two weeks before that status conference the debtor must file a court notice explaining the progress by the debtor in confirming a consensual plan and giving other information as the court may need. If the debtor cannot apply to a consensual plan within 90 days, the debtor may file or request an extension plea. The bankruptcy court will decide if they will approve or deny the requested extension plea. The Bankruptcy Council will base their decision depending on the circumstances if it is the debtor’s out of control.
REMEDIES UPON PLAN DEFAULT
Section 1191 (c) needs the plan to provide suitable remedies to protect holders of interest-bearing claims if planned payments are not made. The normal requirements under Chapter 11 would only make the plan following section 1129 (a) (11), which does not require remedies to protect creditors. The best way to avoid this requirement is to assure the court with certainty that the debtor will be able to pay everyone under the plan. Filling such a standard is unlikely except the plan already proposes a liquidation and fewer distributions to creditors. Any payment plan based on the expected income that will not be received is likely to be uncertain. The advantage provided to creditors by this provision is that when a plan includes a remedy, the creditor has good grounds to compel the debtor to pursue those remedies in exchange for removal in the case of Chapter 11 or subsequent new filing of a case in Chapter 11 (Chapter 22). It is also unlikely that the courts will view further reorganization as an adequate remedy, but may force a liquidation to protect the interests of creditors.
In this time of the pandemic, many businesses are struggling to survive. This may result in an increase in the number of debtors that need the protection of bankruptcy. If you are one of them, maybe this option is good for you. Despite your financial burdens, it is clear the advantages to be eligible under Subchapter V. It makes small business bankruptcy proceedings more efficient and cheaper. You can reorganize, continue to operate, and keep your business alive.
But of course, you need someone who can help you to find what is the best thing to do. Here in Shaff Bankruptcy Lawyer, we will provide the assistance that you need. We had the experience of 1,000+ cases with a 99% winning rate. Our team will give you a guiding hand helping you to move a difficult strategy. We treat our clients with respect and give them the personalized attention that they deserve.
Our team will take you through the extensive process of baby steps so you can make an informed decision. Here is the link to book a FREE Consultation with us!
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