Chapter 11 of the U.S. Bankruptcy Code “is a form of bankruptcy relief that is typically used by businesses to reorganize their financial affairs.” H.R. Report 116-171, 116th Congress. Individuals can also reorganize under Chapter 11. Chapter 11 is sometimes the only workable option when an individual’s debt obligations exceed the debt limits applicable in Chapter 13. Unfortunately, costs and hurdles associated with a traditional Chapter 11 have resulted in small businesses and individuals being the least likely to reorganize successfully in a Chapter 11.
In an attempt to create a more streamlined and cost efficient reorganization process, the Small Business Reorganization Act of 2019 (“SBRA”), Pub. L. No. 116-54, was passed by Congress and signed into law effective February 19, 2020. The SBRA created a new Subchapter V (five) of Chapter 11. The legislative purpose of the new Subchapter V is to provide a fast track for small businesses and individuals to confirm a consensual plan with the assistance of a newly created subchapter V trustee. SBRA’s key provisions seek: to increase a debtor’s ability to negotiate a successful reorganization while retaining control of the business; to reduce unnecessary procedural burdens and costs; and to increase oversight and ensure quick reorganizations.
Difference
Ch. 11
Sub V
Notes
1
Debt limits
No
Yes
The original debt limits to file Subchapter V was $2,725,625. Those limits were increased to $7,500,000 by the Coronavirus Aid, Relief, and Economic Security Act of 2020. There are no debt limits in a traditional Chapter 11.
2
Trustee
No
Yes
Neither Chapter 11 nor Subchapter V involve an operating trustee (i.e. an independent third party appointed to control operations and finances upon the filing of the case). However, Subchapter V created a new type of trustee appointed upon the filing of a case.
In general, among the most important subchapter V trustee duties are assessing the financial viability of the small business debtor, facilitating a consensual plan of reorganization, and helping ensure that the debtor files or submits complete and accurate financial reports. The subchapter V trustee also may be required to act as a disbursing agent for the debtor’s payments to creditors under the confirmed plan of reorganization.
In general, among the most important subchapter V trustee duties are assessing the financial viability of the small business debtor, facilitating a consensual plan of reorganization, and helping ensure that the debtor files or submits complete and accurate financial reports. The subchapter V trustee also may be required to act as a disbursing agent for the debtor’s payments to creditors under the confirmed plan of reorganization.
3
Creditor’s committees
Yes
No
In a Chapter 11 unsecured creditors can elect to form a committee to represent all unsecured creditors. The attorney’s fees and costs for a committee are administrative expenses in the bankruptcy case and paid by the debtor. There are no committees under Subchapter V
4
Confirmation of a Plan without consenting creditors
No
Yes
In a Chapter 11 case, at least one impaired creditor class must agree to the treatment of its claim under a proposed plan of reorganization. Gaining that acceptance can prove to be a challenge, particularly in an individual Chapter 11 where impaired creditors often do not participate in the bankruptcy case. In a Subchapter V case, a plan may be confirmed by the Court even if it has not been accepted by a single creditor. Subchapter V imposes certain requirements on the Plan that must be satisfied for a so-called nonconsensual plan to be confirmed.
5
Short plan filing deadline
No
Yes
In a Subchapter V, the debtor must file a plan of reorganization within 90-days of the case being filed. In a traditional Chapter 11 there is generally no deadline to file a plan, except in a “small business Chapter 11” where the deadline to file a plan is 300-days from the filing date.
6
Disclosure statement
Yes
No
In a Chapter 11, a debtor is required to file a disclosure statement with a plan of reorganization. The debtor must obtain court approval of the disclosure statement before soliciting votes in favor of the plan. The disclosure statement is a detailed document setting forth the debtor’s history, the debtor’s finances, an explanation of how the plan will funded, financial projections and other information. The process of drafting and gaining court approval of the disclosure statement is typically a very large expense for the debtor. There is no disclosure statement requirement in Subchapter V.
7
Competing plans
Yes
No
A Subchapter V debtor has the exclusive right to file a plan of reorganization. In a Chapter 11, the debtor has the exclusive right to file a plan for 120-days, but that deadline may be extended for cause. If the deadline is not extended, 121-days after the case is filed a plan of reorganization may be filed by any party in interest, including a creditor or a creditor’s committee.
8
Absolute priority rule
Yes
No
In a Chapter 11, there is a rule that a class of creditors may not retain their claims or interests in the debtor or assets of the bankruptcy estate, unless and until the claims of a higher priority are paid in full. The rule is typically only triggered upon an objection by a creditor. However, when raised it creates a particularly problematic situation in an individual Chapter 11 case where the debtor seeks to pay only a fraction of general unsecured debt and discharge the rest. Simply put, under this rule the individual debtor may not retain the assets included in the bankruptcy estate (such as a home) unless the general unsecured creditors are paid in full. While this rule often results in a negotiated treatment of the objecting class of creditors, it can result in the debtor being required to pay all debt in full. There is no absolute priority rule in a Subchapter V.
9
U.S. Trustee’s fees
Yes
No
In a Chapter 11, a debtor is required to pay a quarterly fee to the U.S. Trustee based the disbursements made by the debtor during the quarter. Disbursements include all payments made by the debtor. Fees range for $250 for total expenditures under $62,624, to 0.4% for expenditures above $62,624, but below $999,999, to .08 of disbursements above $999,999, but under $31,249,937. There are no U.S. Trustee’s fees in a Subchapter V. This can be of particular benefit when a debtor intends to sell a large asset with secured debt during the case. The payment of secured debt through a sale is considered a disbursement. Thus, a sale that pays of a $500,000 mortgage would result in U.S. Trustee fees of $2,000.
10
Modification of loan secured by primary residence
No
Yes
In all chapters of the Bankruptcy Code there has long been a blanket prohibition against the modification of a loan secured by a deed of trust against a debtor’s primary residence. Subchapter V makes a slight departure from this rule by allowing a loan secured by a Debtor’s primary residence to be modified if the proceeds of that loan were used for business purposes. For example, if a debtor took a home equity loan out against their primary residence and used the proceeds of that loan to start a business or contribute to an existing business, the loan could be modified in a Subchapter V case.
