Small Business Bankruptcy

In February 2020, the Small Business Reorganization Act of 2019 became effective, implementing a new pathway for small businesses to file bankruptcy. Codified in Subchapter V of Chapter 11 of the United States Bankruptcy Code, this subchapter initially applied to small businesses with debts of less than $2,725,625.00. The subchapter allows for a simpler bankruptcy process, a few highlights of which are below:

1. Arguably the most impactful advantage to filing bankruptcy under Subchapter V is the elimination of the absolute priority rule. The absolute priority rule, which applies in traditional Chapter 11 bankruptcies, provides security for creditors to be paid prior to individuals/businesses with equity. However, this provision is eliminated in Subchapter V, eliminating a hurdle for small businesses seeking confirmation of their bankruptcy plan. Subchapter V retains certain confirmation provisions of traditional Chapter 11, stating that the plan shall be confirmed so long as the “plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. §1191(b)
2. There is a 90-day window to file the plan;
3. A status conference is to be held within 60-days of filing under Subchapter V; at least two weeks prior to the status conference, a debtor has to file a “report that details the efforts the debtor has undertaken and will undertake to attain a consensual plan of reorganization.” 11 U.S.C. § 1188(c); and
4. Only the debtor has the power to file a plan.

In light of the COVID-19 pandemic, the debt limit for a small business to file bankruptcy under Subchapter V of Chapter was increased to $7,500,000.00 for a period of one-year. Given the impact of the COVID-19 pandemic and its remaining impact on small businesses, a recent action by President Biden ensured that the increased debt limit will be effective for an additional year. The COVID-19 Bankruptcy Relief Extension Act was signed by President Biden on March 27, 2021, extending the increased debt limit for a period of one year, through March 27, 2022.

Overall, Subchapter V of Chapter 11 of the United States Bankruptcy Code provides a much more streamlined, efficient process for small businesses to file bankruptcy. Moreover, in light of the increased debt limit, small business that have seen their debts drastically increase during the difficult COVID-19 pandemic may still be able to take advantage of this simpler bankruptcy path.

By: Zachary N. Layne