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3 Best Practices for Subchapter V Small Business Bankruptcies

The Subchapter V bankruptcy process allows small businesses to achieve the benefits of a Chapter 11 filing without many of the costs and drawbacks that have traditionally made Chapter 11 filings unviable for smaller companies. Just like a traditional Chapter 11 filing, the purpose of a Subchapter V filing is to reorganize the company’s debts so that it can remain viable as a going concern. By hiring an experienced Miami Chapter 11 bankruptcy lawyer to help them navigate Subchapter V, small business owners can reduce their company’s debt load and negotiate a favorable payment plan that allows them to pay down the company’s debt (and rebuild its credit) over time.

Key Considerations for Small Business Owners Considering a Subchapter V Bankruptcy

Achieving the benefits of a Subchapter V small business bankruptcy requires an informed and strategic approach. To assist small business owners the U.S. Bankruptcy Court has published a list of best practices. Here are some of the highlights:

1. Ensuring that the Business is Eligible to File Under Subchapter V

Before initiating a Subchapter V filing under Chapter 11, business owners should ensure that they are eligible to file. As the U.S. Bankruptcy Court explains, while “[a] good starting point is to read and understand the definition of ‘small business debtor’ under 11 U.S.C. § 101(51)(D) and 11 U.S.C. § 1182. . . . these sections are only one part of the evaluation of whether a company . . . can seek protection under Subchapter V.”

Generally, a company must meet three requirements in order to classify as a “small business debtor” for purposes of Subchapter V. While meeting these three requirements isn’t necessarily sufficient to establish eligibility, ensuring that a company meets these basic eligibility criteria is the first step toward making an informed decision about filing:

  • Commercial or Business Activity – The company must be engaged in “commercial or business activity” at the time of filing. The courts have held that this requires active and ongoing business operations, and, in its list of best practices, the U.S. Bankruptcy Court advises that companies should “[c]onsider filing before all business activity has ceased or consider establishing new ‘business activity.’”
  • Debts of Less Than $7.5 Million – To qualify under Subchapter V, a business’s “noncontingent, liquidated, secured, and unsecured debts” must not exceed $7.5 million. If a debt is disputed (and thus potentially “contingent” rather than “noncontingent”), the business should be prepared to submit adequate supporting documentation if the debt would otherwise take the business over the Subchapter V debt threshold.
  • At Least 50 Percent of Debt from Commercial or Business Activities – When seeking bankruptcy relief under Subchapter V, a debtor must be able to demonstrate that at least 50 percent of its debts arise out of its commercial or business activities.

If a business does not qualify to file under Subchapter V for any reason, then initiating the bankruptcy process under Subchapter V will lead to both unnecessary costs and unnecessary delays. As a result, while small businesses with less than $7.5 million in debt will be eligible to take advantage of Subchapter V’s benefits V in most cases, business owners should not assume eligibility—and should instead consult with an experienced Miami Chapter 11 bankruptcy lawyer.

2. Being Prepared to File a Reorganization Plan

If a business qualifies to file under Subchapter V, the first step is to file a bankruptcy petition with the U.S. Bankruptcy Court. However, the business must also be prepared to file a proposed reorganization plan within 90 days of this initial filing. As a result, before initiating the Subchapter V bankruptcy process, business owners should work closely with their Miami Chapter 11 bankruptcy lawyer to ensure that they will be prepared to submit their proposed reorganization plan on time. As advised in the U.S. Bankruptcy Court’s best practices: “[A] debtor should not expect to be able to obtain an extension, but should be working on the plan immediately and, if possible, even before filing the petition.”

3. Ensuring that the Business’s Reorganization Plan is Feasible

Small business owners must ensure that their proposed reorganization plans are “feasible.” This is a requirement under Chapter 11, and it applies whether the business’s creditors consent to the plan or the business is seeking approval of a non-consensual, or “cramdown,” plan under Section 1191 of Chapter 11.

Under Section 1129(a)(11) of Chapter 11, a proposed reorganization plan will be considered feasible if:

“[T]he plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.”

This requires a thorough financial analysis as well as an in-depth understanding of the general requirements for reorganization plans under Chapter 11. Small businesses pursuing Subchapter V bankruptcies should be able to demonstrate how they reached their feasibility determinations. An experienced Miami Chapter 11 bankruptcy lawyer will be able to assist with this as well—and here, too, it is best to conduct a feasibility assessment before initiating the formal bankruptcy process.

If the business cannot develop a feasible reorganization plan, then it will need to consider alternatives to a Subchapter V filing. These may include negotiating informal workouts with individual creditors, seeking an equity infusion, liquidating under Chapter 7 or pursuing an assignment for the benefit of creditors, among others. However, small businesses will be able to develop feasible reorganization plans in many cases, and if you are interested in keeping your business open, you will want to discuss your options for proving feasibility with an experienced Miami Chapter 11 bankruptcy lawyer.

Request a Free Consultation with a Miami Chapter 11 Bankruptcy Lawyer

If you would like to know more about pursuing a Subchapter V small business bankruptcy in South Florida, we invite you to get in touch. To request a free consultation with a Miami Chapter 11 bankruptcy lawyer at Edelboim Liberman, please call 305-768-9909 or get in touch online today.

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