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New Covid-19 Bankruptcy Law May Help Keep More Local Small Businesses Open

Like many individuals, small businesses are feeling the economic impacts of the COVID-19 pandemic. The Small Business Debt Reorganization Act, known as Subchapter V, was passed in August 2019 but did not go into effect until February of this year. Subchapter V is tailored for small businesses who have historically struggled to overcome time and financial obstacles navigating the traditional Chapter 11 process. Subchapter V has subsequently been modified to broaden the availability of the Chapter 11 protections to more small businesses through the provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

A Little Background on Chapter 11 Cases

Chapter 11 bankruptcy is a method of reorganization which provides a means by which a debtor can restructure and pay creditors without having to liquidate the business. Historically small business debtors have faced obstacles in traditional Chapter 11 cases due to the length and expense of the process, that typically do not hinder large corporations from successfully completing the bankruptcy process. Since North Carolina is not a part of the U.S. Trustee program, traditional Chapter 11 cases filed in North Carolina are supervised by the bankruptcy administrator of the district the case is filed in. Within 120 days of the case being filed the debtor must file a proposed plan for repayment and a disclosure statement containing adequate information about the debtors financial standing that will allow creditors to make an informed decision about whether to accept or reject the plan. The Plan must include a classification of the creditor claims and specify how each class of claims will be treated under the plan. Creditors whose contracts with the debtor will be modified or whose claims will not be paid in full through the plan are considered to be "impaired." Impaired creditors vote on the plan, by ballot, and at least one class of creditors with impaired claims must vote to accept the plan. After the disclosure statement is approved by the court and the impaired creditors’ ballots are collected and tallied, a confirmation hearing is held in which the court determines whether or not the plan will be confirmed. If the debtor does not file a plan within 120 days or if the plan has not been confirmed within 180 days of the case being filed, any interested party may file a plan.

Confirmation does is not the end of the road for Chapter 11 cases. Chapter 11 plans typically take 3-5 years to complete and the case remains pending through the duration of the plan term. While the case is pending the debtor is required to file monthly reports detailing its income and distributions and pay a quarterly fee, based on the amount of distributions for the quarter, to the bankruptcy court. The debtor incurs additional fees if a committee of unsecured creditors is appointed. Once the plan is completed successfully according to the terms therein, the debtor receives a discharge.

How is Subchapter V Different?

In recognition of the time and financial difficulties that Chapter 11 filings can cause to already struggling small businesses, Congress implemented provisions within subchapter V that eliminate many of the required filings and fees for debtors who fall within the small business category. Upon the filing of the case the Bankruptcy Administrator automatically appoints a Trustee who collaborates with the debtor during the reorganization process. The debtor remains in control of the business and is allowed to operate the business throughout the bankruptcy process. The disclosure statement requirement is eliminated unless the Court orders otherwise for cause, such as fraud. Finally, small business debtors enjoy a significant savings through the elimination of unsecured creditors’ committees and the requirement that debtors pay quarterly fees to the court for every quarter that the case is pending.

Who is Eligible for a Filing Under Subchapter V?

A debtor qualifies for a filing under Subchapter V if their debts are less than or equal to $2,725,625. However, pursuant to the CARES Act provisions, the debt amount was been temporarily raised to $7,500,000 and will remain in effect until March 27, 2021, unless extended further by Congress. The increase in the debt limit allows more small businesses, who otherwise would not qualify as a small business debtor, to take advantage of the more favorable provisions under Subchapter V. Debts owed to 1 or more affiliates or insiders of the debtor are not included in tallying the total amount. At least fifty percent of the total debt must arise from the commercial or business activities of the debtor. Debtors whose primary activity is the business of owning single asset real estate are not eligible.

The Subchapter V Process

Cases filed under Subchapter V are more streamlined and progress faster than traditional Chapter 11 cases. Upon the filing of the petition which initiates the bankruptcy case the debtor must elect Subchapter V status at filing if they desire to take advantage of the new provisions, otherwise normal Chapter 11 rules apply. Within 60 days of filing the Court holds a status conference “to further the expeditious and economical resolution” of the case.  14 days before this status conference the debtor is required to file a report detailing its plans for reorganization.

The debtor’ Chapter 11 Plan must be filed within 90 days of the petition filing. Under Subchapter V, Plans can only be filed by the debtor which eliminates the time and expense required to negotiate competing plans which are allowed to be filed by creditors in traditional Chapter 11 cases. In a traditional Chapter 11 case, the Court cannot confirm the plan unless it receives sufficient votes from creditors in impaired classes accepting the plan. In a Subchapter V filing, the court may confirm the debtor’s plan even if it is rejected by creditors from impaired classes as long as it is fair and equitable and meets subchapter V requirements. Once a debtor completes all payments called for under the plan terms the debtor will receive a discharge.

Contact Our Bankruptcy Attorneys Today to Schedule a Free Consultation

If you are a small business owner impacted by the COVID-19 pandemic or other financial difficulties, it is crucial to speak with an experienced bankruptcy attorney. The bankruptcy process is complicated, and it is important that you have the dedicated representation of local counsel familiar with federal bankruptcy laws. With offices in Charlotte, Monroe, and Mooresville, the law firm of Arnold & Smith, PLLC handles bankruptcy cases for the Western District of North Carolina. Contact Arnold & Smith, PLLC today to set up a free initial consultation.