Small Business Bankruptcy and the New Subchapter V Case

Categories: Bankruptcy

Let’s face it, America runs on small businesses like yours and mine. Unfortunately, you and I have discovered that the playing field is not level for us when we don’t have piles of cash or the name Bezos to lean on. We do the best we can to follow the law and now we’re all being squeezed for juice when there is nothing left. Will we survive this pandemic?  The legal answer always is, it depends.

The Small Business Reorganization Act of 2019 (SBRA) became effective on August 23, 2019 and created the new Subchapter V laws. The general purpose was to streamline the current Chapter 11 process for small businesses and individuals engaged in business to administer their bankruptcy estate efficiently and less costly than a traditional Chapter 11 case.

What is the Structure of Your Business?

So many prospective clients are not even certain how their business is structured, which is always my first cause for concern.  Unless you formed a Limited Liability Company, or S-Corp, or C-corp, then you are not eligible to save your company under a Subchapter V bankruptcy case.  You see, this new provision in the Bankruptcy Code is only for corporations.  The good news is that if you’re what we call a ‘sole proprietor’ and file your taxes using a Schedule C with your long form 1040, then you’ll be permitted to file an individual consumer bankruptcy case under the current Chapter 7 or Chapter 13 provisions in the Bankruptcy Code (eligibility requirements apply). An adept and skilled bankruptcy attorney can guide most small business owners, without a corporation, through a consumer bankruptcy case.

On Aug. 23, 2019, the Small Business Reorganization Act of 2019 (SBRA) was signed into law and created a new Subchapter V. The general purpose of Subchapter V was to streamline the Chapter 11 bankruptcy process for small businesses and individuals engaged in business to administer their bankruptcy estate in an efficient and less costly manner. Source This new law only applies to corporate entities. What is does is streamline the process for smaller corporations to remain operational and reorganize under the protection of the Bankruptcy Code.

Is the Corporation Eligible for a Subchapter V Bankruptcy?

As with any benefit, there are always eligibility requirements. First, there is a debt limit of $7.5 million for eligibility. This means that your corporation cannot have debts in excess of that amount, otherwise, the business will need to file under Chapter 11 to remain operational.

Second, at least 50% of the debt incurred, must be incurred in connection with commercial or business activities. And third, if the business activity is to own or operate more than one real property, that business is now eligible under the new Subchapter V.

PPP SBA and Bankruptcy

Under the CARES Act, businesses are eligible for the Paycheck Protection program (PPP). There have been two rounds of PPP funding thus far and these loans are forgiven for eligible borrowers. Our bankruptcy courts are now grappling with these hybrid-type loans that convert to a grant, if certain conditions are met. If the corporation has already received PPP, then it is what it is, but don’t expect to receive these funds with ease AFTER filing for bankruptcy.  The reason is the Small Business Administration (SBA) contract disqualifies a bankrupt business.  While it is possible to receive additional funding in bankruptcy, it won’t be easy or without a fight from the SBA.

SubChapter V or Chapter 7? Decisions Decisions

If the corporation stands a chance at success after Covid-19 restrictions end, then a restructuring of business debts becomes a viable option under the new Subchapter V because is lowers the barriers to entry into bankruptcy for many small businesses. Consider a Subchapter V bankruptcy an opportunity to stay in business and make payments over time to creditors while the company continues to operate.

If the corporation is not likely to succeed, then it may be wound down or file under Chapter 7 of the bankruptcy code to liquidate any assets and pay creditors what it can after it permanently ceases operations.  Keep in mind that corporate debtors do not receive a discharge order (a permanent order preventing collections of debts). This is solely to permit creditors to collect on any personal guarantees made by any shareholders and owners and hold them personally liable for certain debts by agreement or operation of law. A consultation with a skilled practitioner will provide answers that all small business owners can use to make a well-informed decision on the direction needed to achieve corporate goals.

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