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The Small Business Reorganization Act and Subchapter 5 Bankruptcies

Hi, I’m Rob Chewning. I work with the firm of McLaughlin & Nardi, LLC.  At the firm we practice several different types of law, including bankruptcy law.  I am here today to talk to you about The Small Business Reorganization Act and Subchapter 5 bankruptcies.

As a result of COVID-19, millions of small businesses have been forced to shut down and cease business operations indefinitely with no end in sight.  Some of these small businesses have tried to hold on in the hope of getting federal stimulus money that can carry them through this tough time.  However, there are several million other businesses which will not be eligible or will not be able to get their hands on this federal stimulus money which is causing them to consider the options that they have.

With the enactment of The Small Business Reorganization Act, it has introduced this new type of bankruptcy, the Subchapter 5 Bankruptcy.  What it is essentially is a type of Chapter 11 bankruptcy that allows the small business to reorganize their debts and repay them while maintaining their business operations. The issues that a lot of businesses face when deciding whether or not to file Chapter 11 Bankruptcy is the fact that it is very costly and is usually the longest lasting bankruptcy out of all of them. With the introduction of subchapter 5 bankruptcies, it has been narrowly tailored to hopefully accommodate small businesses with less expenses and less time in bankruptcy than let’s say a Chapter 11 Bankruptcy.

The main benefits are the fact that number one, there are no creditor committees. The small business submits a plan of reorganization, which is a plan that tells the creditors how it is going to be repaying their debts and what debts are going to be repaid. When it submits that plan, unlike in a normal Chapter 11, it would not need to be approved by the actual creditors that form the basis of your bankruptcy. This again will save you time and money in having to deal with any sort of objections that creditor committees generally might have.

The second benefit is that the U.S. Trustee is assigned to every subchapter 5 bankruptcy and what that Trustee will do is oversee, maintain and ensure that you are complying with the plan of reorganization, which is a good thing to save time and money throughout the bankruptcy.

And the third benefit is the fact that the business debtor will not need to have to file a disclosure statement.  Disclosure statements are generally submitted along with a plan of reorganization. They are and can include complex financial documents that explain the business operations and how you are going to be repaid. With that being removed as a requirement, it again will save you legal costs that are associated with getting that created and submitted to the Bankruptcy Court.

The Small Business Reorganization Act has limited the small businesses that may be eligible to file for a subchapter 5 bankruptcy. The limitation is that the individual or small business has to have less than $2,725,625 in debt.  What that means is that debt can include both secured and unsecured and it will exclude any debt that is related to an insider or affiliate.

Another important key note to remember when filing a subchapter 5 bankruptcy is the fact that there will be several financial documents that your attorney will need to review prior to filing a bankruptcy.  They will include financial statements, tax returns and any other financial documents that establish what your business operations are and also show what debts you have. It is important to have those documents prepared beforehand because there will be a lot or prepetition planning with your attorney because a plan of reorganization will be required within 90 days of the filing of the bankruptcy.

If you or a business have any questions with regards to filing or whether or not they are eligible for filing a subchapter 5 bankruptcy, please reach out to us.  You can reach us on our website or give us a call at (973) 890-0004.  We are here to help and we hope we can.  Thank you so much.


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