Rountree Leitman & Klein, LLC: COVID-19 Updates
In a previous post, we provided commentary on Subchapter V of Chapter 11 of the Bankruptcy Code, which was first introduced through the Small Business Reorganization Act, effective February 2020. Of course, at the time that Congress passed the Act, it could not be predicted that the global economy would slow down immensely due to the COVID-19 pandemic. Nonetheless, the Act could not have come at a better time for small businesses. Prior to the introduction fo Subchapter V, many struggling small businesses were faced with the fact that they could not afford a traditional Chapter 11 bankruptcy case and instead had to proceed forward with a liquidation under Chapter 7 or look at other options. The creation of Subchapter V has eliminated those concerns, making a reorganizational bankruptcy more attractive to small businesses.
First, Subchapter V originally permitted businesses with secured and unsecured debt less than approximately $2.7 million to qualify. Due to the COVID-19 pandemic, Congress increased that limit to $7.5 million. Many small and medium sized businesses may now qualify for relief under Subchapter V. However, businesses that primarily derive their income from the operations of a single real estate asset are not qualified to file under Subchapter V.
Second, Subchapter V permits debtors to spread their debt payments out over a three to five year period. This is much like an individual Chapter 13 bankruptcy case. Furthermore, unlike a traditional Chapter 11 bankruptcy case, administrative expenses may be paid during this extended repayment period.
Third, Subchapter V cases move more quickly than traditional Chapter 11 bankruptcy cases. The debtor generally must file its plan within ninety days of filing bankruptcy. Bankruptcy courts, however, may extend these deadlines, especially in light of the COVID-19 pandemic.
Fourth, a Trustee is automatically appointed in a Subchapter V filing. Unlike a Chapter 7, 13, or 11 case, however, once the Trustee is appointed under Subchapter V, the debtor continues to retain control of its assets and operations. The Trustee acts more like a third-party working to confirm a plan, instead of investigating the debtor’s financial condition and affairs. Further unlike a traditional Chapter 11 bankruptcy case, a creditor’s committee may only be appointed for cause. Creditor committees are expensive and ultimately cost prohibitive for many small businesses since the debtor is on the hook for the committee’s fees and expenses.
Many small businesses have applied for Paycheck Protection Program and Economic Injury Disaster loans. Some small businesses have received their loan proceeds, while others are still waiting. Once these funds are exhausted, however, we anticipate that Subchapter V filings will increase as the economy has drastically changed due to the COVID-19 pandemic. Many of these Subchapter V filings will be driven by small business recipients being unable to qualify for the loan forgiveness criteria of PPP loans.