What to Expect During (and After) the Subchapter V Small Business Bankruptcy Process

Subchapter V bankruptcies allow small businesses to reorganize their debts without facing the additional costs and challenges involved in a traditional Chapter 11 filing. Since Subchapter V was introduced in 2020, it has become an extremely popular tool for businesses that need relief from their current debt loads in order to continue operating as a going concern.

But, before filing for bankruptcy under Subchapter V, it is important that business owners know what they can expect during (and after) the process. While business owners will need to consult with a Miami Chapter 11 bankruptcy lawyer regarding their companies’ unique circumstances, here is a general overview of some key steps and considerations involved:

How Subchapter V Bankruptcies Differ from Traditional Chapter 11 Bankruptcies

One of the easiest ways to understand the benefits of filing for bankruptcy under Subchapter V is to look at the major differences between filing under Subchapter V and filing for a traditional Chapter 11 reorganization. Some examples of these differences include:

• Role of the Trustee – While filing under Subchapter V still involves the appointment of a bankruptcy trustee, the trustee’s role in a Subchapter V case is primarily focused on facilitating a consensual reorganization plan. In a traditional Chapter 11 case, the trustee plays a much more active role in monitoring the business’s operations and supervising the bankruptcy process.
• Disclosure Statement – In a traditional Chapter 11 case, the business must prepare and file a disclosure statement with “adequate information” about its financial affairs. This alone can be a time-intensive and resource-intensive process. In a Subchapter V case, a disclosure statement generally is not required.
• Proposed Reorganization Plan – In a Subchapter V case, only the business can submit a proposed reorganization plan (and it is required to do so within 90 days of filing its bankruptcy petition). In a traditional Chapter 11 case, creditors can propose a reorganization plan if the business fails to do so in a timely manner.

Subchapter V small business bankruptcies proceed on a more streamlined timetable than traditional Chapter 11 cases, and, as a result, they generally cost less (and often significantly less) as well. Additionally, in a Subchapter V case, the business is not required to pay quarterly fees to the United States Trustee.

There is No Creditor’s Committee (in Most Cases)

Another major difference between Subchapter V small business bankruptcies and traditional Chapter 11 cases is the absence of a creditors’ committee. Under Subchapter V, the court may only require the appointment of a creditors’ committee “for cause.” As stated in the Justice Department’s SBRA Legal Manual, “Generally, the United States Trustee will not have sufficient information to establish cause for the appointment of a creditors’ committee.” Not only does this help to further streamline the process, but it also reduces the risk of creditors’ objections interfering with the approval of the business’ proposed reorganization plan. In Subchapter V cases, the bankruptcy courts will approve both consensual plans and non-consensual, or “cramdown” reorganization plans, as long as they meet Chapter 11’s general feasibility requirement.

Small Businesses Must Meet Various Requirements During the Subchapter V Bankruptcy Process

Along with proposing a feasible reorganization plan, small businesses must meet various other requirements during the Subchapter V bankruptcy process. Some examples of these requirements include:

• Filing a statement of financial affairs and all required schedules
• Filing periodic financial reports
• Attending all scheduling conferences and other meetings scheduled by the court or trustee
• Allowing the trustee to inspect the business’s books and records
• Maintaining insurance and filing all required tax returns

This list is not exhaustive, and business owners should work closely with their Miami Chapter 11 bankruptcy lawyer throughout the process to ensure that they do everything necessary to secure approval of their proposed reorganization plan. Oversights and delays can lead to unnecessary challenges and can even threaten successful reorganization in some cases.

Seeking Approval of the Small Business’ Consensual or Non-Consensual (“Cramdown”) Plan

Many of the provisions of Chapter 11 that govern the approval of reorganization plans in traditional cases do not apply in Subchapter V cases. However, there are still several conditions that small businesses must meet in order to secure approval.

If each class of creditors accepts the business’s reorganization plan, the plan will be classified as “consensual.” In this case, the court will generally approve the plan—as long as it meets Chapter 11’s feasibility requirement. Practically speaking, creditors generally will not consent to a proposed reorganization unless they believe that the business has the ability to make its payments as they come due.

If any creditors object to the business’s proposed reorganization plan, the business can seek approval of its “non-consensual” plan. Under Subchapter V, many of the restrictions on the approval of non-consensual plans in traditional Chapter 11 cases do not apply. Subchapter V allows for approval as long as “the plan does not discriminate unfairly and that the plan is fair and equitable with respect to each class of impaired claims or interests that has not accepted the plan.”

Post-Confirmation Proceedings, Case Closing, and Post-Closing Modifications

Once the business’s reorganization plan has been “substantially consummated,” the business can seek a final order closing its Subchapter V bankruptcy case. The trustee will distribute any funds that are being held, and once all necessary administrative procedures have been finalized, the case will close. After closing, the business must consistently make timely payments in accordance with its approved reorganization plan—though businesses can seek to modify their Subchapter V reorganization plans post-closing in appropriate circumstances.

Speak with a Miami Chapter 11 Bankruptcy Lawyer in Confidence

At Edelboim Lieberman, we have substantial experience guiding small businesses through the Subchapter V bankruptcy process. If you would like to know more about seeking to reorganize your business’s debts under Subchapter V, we invite you to schedule a confidential consultation. To speak with a Chapter 11 bankruptcy lawyer at our Miami offices in confidence, please call 305-768-9909 or request an appointment online today.