In Texas and other states, bankruptcy is an important element to understand when managing a business. It can protect the owner from the debt of the business and provide a business that has taken on too much debt a path forward to resolving that debt and potentially returning to profitability. The bankruptcy process for businesses is called Chapter 11, and a new element called Subchapter 5 is suited to small businesses.
The role of Subchapter 5 in getting out of debt
Chapter 11 is historically a way for businesses to go through the bankruptcy process. However, going through bankruptcy itself can cost a lot of money and time, and it isn’t always accessible for small businesses because of the need to pay all of the fees at once, file a detailed disclosure in court and get all creditors to approve the deal, along with other requirements. For a small business, this can be difficult. Subchapter 5 is a small business-directed alternative.
Under Subchapter 5, the business can stay open and keep collecting revenue to pay down its debts according to the payment plan. The business can also make its own plan that does not need to be approved by creditors, and under Subchapter 5, the business can pay for the administrative costs and fees over time instead of all at once. It’s a more accessible form of Chapter 11 bankruptcy.
Subchapter 5 is limited to businesses with less than $2.75 million in debt, among other restrictions, which prevents big companies from taking advantage of it. It’s a way to help small businesses get out of debt without being forced to close down permanently.