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Bankruptcy Benefits Of CARES Act Set To Expire

Updated on
February 3, 2021
Article written by
Attorney Kevin O'Flaherty

This article will discuss the benefits afforded to debtors under the Small Business Reorganization Act of 2019 and the CARES Act. We will answer the following questions:


  • What is the Small Business Reorganization Act?
  • Am I eligible for Subchapter V bankruptcy?
  • What are the benefits of Subchapter V reorganization?
  • When is the deadline to petition for Subchapter V bankruptcy?


Chapter 11 bankruptcy is a common option for larger companies seeking to reorganize their finances and develop a payment plan to get them out of debt. However, Chapter 11 can be time-consuming, resource-intensive, and costly, making it a less desirable option for small businesses. The Small Business Reorganization Act passed in February of 2020 included Subchapter V, which softened some small business debtors' restrictions and challenges. The CARES Act expanded Subchapter V eligibility by increasing the debt limit from just over 2.7 million to 7.5 million. 


While many small businesses have managed to stay afloat via the PPP loan programs, many more face uncertainty in the coming months. The latest Covid-19 stimulus shows some signs of life and may very well be signed into law before this article is posted. Whatever happens, small businesses facing bankruptcy will need to decide before long as the expanded benefits of Subchapter V will expire in March 2021.


What Is The Small Business Reorganization Act (SBRA)?


Chapter 11 bankruptcy benefits have remained elusive for many small businesses due to their limited financial resources. Before the SBRA, floundering businesses had to choose between filing Chapter 7 bankruptcy or Chapter 11; the former likely resulted in the business's complete liquidation, while the latter restructures the debt into a 3 to 5 year plan, enabling the company to continue operating but with significant oversight. 


The changes under the SBRA aim to bridge the gap between Chapter 7 and Chapter 11. Debtors that qualify for the new Subchapter V bankruptcy will maintain control of their company and reorganize under a 3 to 5 year plan, but will not be subject to the higher price tag that accompanies the usual Chapter 11 requirements. Amendments under the SBRA also serve to streamline the plan confirmation process, ease the confirmation requirements, and decrease the overall cost of confirmation, as seen with Chapter 11 bankruptcy.


Am I Eligible For Subchapter V Bankruptcy?


The first hurdle to being eligible for Subchapter V bankruptcy is to meet the definition of a "small business debtor" and formally acknowledge as a Subchapter V debtor. Under the CARES Act amendment, a small business debtor is defined as being engaged in commercial or business activities, with an aggregate debt of no more than $7.5 million. No less than 50 percent of debt can be due to the regular business activity of the debtor. Small businesses with debts that are primarily contingent or unliquidated may not be eligible for Subchapter V because these debts are not readily quantifiable. However, the CARES Act's increased caps have made it easier for small and midsize businesses to qualify for Subchapter V if it can be shown that it's noncontingent and unliquidated claims total less than $7.5 million. If you're considering Subchapter V, but you're not sure if your company qualifies, reach out to an experienced bankruptcy attorney.


What Are The Benefits Of Subchapter V Reorganization?


The SBRA and Subchapter V enable many small businesses to continue operating when, in the past, they would be forced to close their doors and liquidate their assets. The primary goal of the amendment was to provide an affordable, streamlined version of Chapter 11 bankruptcy; it does so through the following benefits:


  • A disclosure statement is unnecessary unless ordered by the court. This saves the debtor significant time and money in the early stages of the bankruptcy process;
  • There are no costly United States Quarterly Trustee Fees typically paid with Chapter 11 bankruptcy;
  • A trustee with no interest in the bankruptcy is appointed to every case to oversee its progress and facilitate plan approval;
  • Creditors are not required to be paid in full before equity can be retained. This is a significant departure from the rules of traditional Chapter 11 bankruptcy where certain debts could not be "crammed down" to preserve equity;
  • Debtors have the right to file Chapter 11 bankruptcy without the approval of impaired creditors;
  • A committee of unsecured creditors is not appointed as seen in typical chapter 11 cases unless the bankruptcy court orders otherwise; and
  • The SBRA allows an individual debtor to modify their mortgage


The above is a non-exhaustive list of the benefits under the Small Business Reorganization Act. To get more information on how Subchapter V can help your situation, we suggest speaking to a bankruptcy attorney.


When Is The Deadline To Petition For Subchapter V Bankruptcy?


While the changes enacted by the Small Business Reorganization Act will remain, the extended benefits found in the CARES Act are set to expire March 31st, 2021. The ensuing change in administration or the looming Covid-19 stimulus package may see the deadline extended, but small business owners considering bankruptcy shouldn't rest on this assumption.


Bankruptcy Benefits Of CARES Act Set To Expire
Author

Attorney Kevin O'Flaherty

Kevin O’Flaherty is a graduate of the University of Iowa and Chicago-Kent College of Law. He has experience in litigation, estate planning, bankruptcy, real estate, and comprehensive business representation.

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