From our offices in Miami, we serve clients throughout Florida.

Subchapter 5 of the Bankruptcy Act could help small businesses

Florida business owners seeking to restructure their debts may qualify for a Subchapter 5 filing. Congress added Subchapter 5 to Chapter 11 of the U.S. Bankruptcy Code in 2020. The new chapter allows businesses with liabilities of less than $2.7 million to reorganize.

The Business Journal reports that during its first year, approximately 20% of federal bankruptcies reflected Subchapter 5 petitions. More than 1,600 businesses reorganized through Subchapter 5, which includes a court-appointed trustee. Debtors may continue possessing assets while repaying creditors.

The difference between Chapter 11 and Subchapter 5 bankruptcy

Traditional Chapter 11 bankruptcies require commercial debtors to create a plan of reorganization. As noted by the Administrative Office of the U.S. Courts, a plan requires a majority vote of approval from a committee of the creditors affected by the bankruptcy. A trustee oversees the repayment arrangement and places a fiduciary responsibility on the business to act as a debtor in possession of a creditor’s property.

Subchapter 5 does not require a creditors’ committee. Instead of voting on a plan’s approval, creditors must consent to the debtor’s reorganization plan. The U.S. Department of Justice website notes that debtors continue operating their businesses. The business must maintain insurance and file timely financial schedules with the court.

Subchapter 5’s speedy reorganization plan

After filing a Subchapter 5 bankruptcy petition, debtors have 90 days to submit their reorganization plans, as reported by CFO Dive. Unlike Chapter 11 cases, plans may outline how debtors could pay their creditors with their projected disposable income while they keep their assets.

With Subchapter 5 bankruptcies, businesses may find relief from overwhelming liabilities. Debtors generally also incur less court and legal expenses due to the absence of a creditors’ committee.

Share This