Mr. Tittle at Tittle Law Firm has eliminated millions of debts for its debtors in Subchapter V.
What is Subchapter V and what are its advantages of traditional Chapter 11?
On August 23, 2019, the Small Business Reorganization Act (the “SBRA”) was signed into law and created a streamlined and more efficient and cost-effective method by which small businesses in the United States can take advantage of the corporate reorganization provisions of the United States Bankruptcy Code (the “Bankruptcy Code”).
In order to qualify for Subchapter V, a debtor must be a business engaged in commercial or business activities and have aggregate noncontingent liquidated secured and unsecured debts of not more than $3,024,725, excluding debts owed to affiliates or insiders.
Below are the specific significant advantages of Subchapter V over traditional Chapter 11 are as follows:
Less Expensive: Due to the benefits of filing Subchapter V, as described below, the fees and expenses incurred are generally less than half of those sustained had the business filed a traditional Chapter 11 bankruptcy.
No Risk of Losing Your Equity: In its simplest terms, the business owners do not risk losing their equity interest through a plan of reorganization because there is no “Absolute Priority Rule” in Subchapter V. Generally, equity owners in traditional Chapter 11 must insert new value equal to the value of the business in the plan of reorganization if the debtor attempts to cram down unsecured creditors and pay them pennies on the dollar. The Absolute Priority Rule will not allow the equity owner to retain their equity interest unless the secured creditors are paid in full. Because there is no Absolute Priority Rule, the Debtor may cram down unsecured creditors by paying the debtor’s disposable income and the owner may retain their equity.
No United States Trustee Fees: Subchapter V cases are less expensive for debtors because they do not have the pay the fees of the U.S. Trustee, the independent attorney commonly tasked with protecting the rights of the unsecured class of creditors. Instead, the Subchapter V debtor merely has to pay the attorney fees of the Subchapter V trustee, which generally ranges between $5,000 and $7,500 per case.
No Creditors’ Committee: Traditional Chapter 11 allows for the appointment of an official committee of unsecured creditors, which generally consists of up to seven of the debtor’s top unsecured creditors that serve the interests of the entire body of unsecured creditors as a whole. An unsecured creditors’ committee wields a great deal of power and may be able to delay or even prevent Plan confirmation. Instead, a Subchapter V trustee is appointed, primarily to assist the debtor in formulating its plan and negotiating with creditors.
Expedited Timeframes: Subchapter V features an expedited case schedule, including an early status conference within the first 60 days of the case and a plan submission deadline of 90 days. The average time from the date the petition is filed until plan payments begins is approximately 7 months.
No Competing Plans: In traditional Chapter 11, if a debtor does not propose a Plan within 120 days of its bankruptcy filing (subject to extension by the court), any of its creditors may propose a competing Plan. Such a competing Plan will naturally be adverse to the debtor’s interests, as the debtor effectively loses control of the Chapter 11 process. In Subchapter V only the debtor may file a Plan. This is a substantial advantage over traditional Chapter 11 in that it ensures that the debtor remains in control of Plan proposal and confirmation.
No Disclosure Statement: In addition to filing a plan of reorganization, a debtor in traditional Chapter 11 is required to draft and file a disclosure statement that provides adequate information upon which a creditor can rely in making an informed judgment on whether to vote to accept or reject a Plan. This additional requirement adds substantial expense to the confirmation process. However, in Subchapter V a debtor is not required to draft and file a disclosure statement, with only a Plan being sufficient.
Creditor Consent Not Required: In a traditional Chapter 11, a debtor may only confirm a plan of reorganization if one impaired class of creditors votes to accept the plan. In Subchapter V, the debtor does not need any votes in order to confirm a nonconsensual plan. A nonconsensual plan requires that the plan does not unfairly discriminate and is fair and equitable, as described below.
Fair and Equitable Test: Instead of having to comply with the Absolute Priority Rule or that one impaired class of creditors votes to accept the plan, a Subchapter V debtor must satisfy a “fair and equitable” test as to unsecured creditors, which the debtor can satisfy if the Debtor pays its “disposable income” to its creditors over a three-to-five-year period. Disposable income is defined as any income received by the debtor that is not reasonably necessary to (1) maintain and support the debtor or a dependent; (2) satisfy domestic support obligations that become first payable post-petition; or (3) ensure the continuation, preservation, or operation of a business.
What will I need in order to start the process for filing a bankruptcy under Subchapter V?
In order to begin the process of preparing your bankruptcy filing under Subchapter V, you will need current financial statements and books and records, up-to-date tax returns or an extension for the current tax year, and general liability and property insurance in the name of the business.
What is the average cost of attorney fees and expenses in a Subchapter V?
The average costs of attorney fees and expenses range between $50,000 and $100,000 depending on the complexity of the issues presented in the case and the degree by which the creditors contest plan confirmation.
What is the average retainer charged by Tittle Law Firm for filing a Subchapter V?
Tittle Law Firm charges a retainer that is equal to 50% of the estimated cost of completing the Subchapter V, and the retainer may be paid in installments as long as the retainer is paid in full before filing. Tittle Law Firm will draft all documents prior to filing the bankruptcy so that by the time the bankruptcy is filed, the hard work is already completed. Under this approach, the clients of Tittle Law Firm may rest assured that they are well prepared for any issue that may present itself in the case.
How long does it take to prepare for filing?
The time frame required for filing is dependent on each client and their ability to produce all documents to Tittle Law Firm and pay the retainer. Once Tittle Law Firm receives all documents requested, the turnaround time is generally 2 to 3 weeks.
Other Common Questions:
- Does a Subchapter V bankruptcy filing for my business impact my personal credit score?
No, a Subchapter V bankruptcy filing for your business will have zero impact on your personal credit score. However, if you signed a personal guarantee for a business loan, you may be sued by the creditor in state court on behalf of the personal guarantee.
- Will Creditors be able to continue litigation against me after I file bankruptcy under Subchapter V?
No, the automatic stay prevents creditors from pursuing the debtor after the bankruptcy is filed. However, the creditor may pursue personal guarantors in state court because the automatic stay does not protect non-debtors.
- Will a Merchant Cash Advance Lender be required to remove all UCC liens filed with my customers and credit card processors?
Yes, after the bankruptcy is filed, the automatic stay requires that all creditors cease all collection efforts. Merchant Cash Advance lenders are required to notify the credit card processors and customers that the UCC lien has been removed.
- Will I be able to operate my business after the bankruptcy is filed?
Yes, after the bankruptcy is filed, you may continue operations just like before but with one caveat: in the event the debtor seeks to transact business outside the ordinary course of business, the debtor will need to seek court approval before taking action.