Congress is considering expanding Chapter 11 subchapter 5 bankruptcy to help small businesses. Given the ongoing effects of the pandemic on small businesses, this extension is critical.
Extension of sub-chapter 5 to support small businesses
In 2019 Subchapter 5 was added to Chapter 11 of the U.S. Bankruptcy Code in an effort to make reorganization bankruptcies more accessible to small businesses. It came into force in 2020 and as the pandemic continued to wreak havoc on millions of small businesses, sub-chapter 5 was enforced. At the time, homeowners with debt of $2.75 million or less could file for bankruptcy.
However, as things got worse, the expected increase in small business bankruptcies led Congress to expand Sub-Chapter 5 eligibility to $7.5 million for one year in the CARES Act (Coronavirus Aid, Relief, and Economic Security). If Congress does not renew the upper limit of $7.5, it will expire in March.
To date, more than 2,800 files have been submitted since the program was launched. And that number will increase dramatically as small business owners face supply shortages, high inflation and gas prices, and the lingering effects of the pandemic. Banks and landlords are also stepping up efforts to collect overdue loans and rent arrears. And all of these factors will all contribute to more bankruptcy filings.
Claim sub-chapter 5 Bankruptcy
As originally intended, you must pursue business activities and your debt cannot exceed $2.75 million in order to file a claim. Additionally, 50% of the debt must come from business activities and the debt cannot include those owed to company insiders. Also, if your main business activity is owning and operating a single property, you are not eligible.
Only your company can apply for the plan, unlike other Chapter 11 cases that allowed creditors to file a plan for you. And a special trustee will be appointed to oversee the operation of the business and make recommendations on the reorganization plan.
Regarding the payments for the plan, sub-chapter 5 also takes into account the difficulties of small businesses. Unlike Chapter 11 cases, you don’t have to pay the administrative fee when the plan begins. You can pay the fees over the term of the plan, which can be three or five years.
How Subchapter 5 Helps Small Businesses
With Sub-Chapter 5, small businesses that are struggling to pay off their debt but still making a profit have an easier way to pay off their debt. When a company files a Subchapter 5 case, creditors must agree to court-approved three- to five-year repayment plans. This includes the ability to reduce unsecured debt such as credit cards.
With Subchapter 5, you can continue running your business as long as you make the required payment plan.
If you are considering filing for bankruptcy, be sure to consult with a bankruptcy attorney.