COVID-19 Small Business Bankruptcy Relief
Many small businesses throughout the U.S. have sadly struggled to survive the challenges posted by the novel coronavirus. If a business is overwhelmed by debt, its owners may decide to file for bankruptcy. Businesses most often file for bankruptcy under Chapter 11 or Chapter 7 of the Bankruptcy Code. While Chapter 11 historically has proven more useful to large businesses, changes under recent federal laws make it a good option for small businesses during the COVID-19 outbreak.
Lower Costs and Streamlined Process
Owners now have a way to keep their equity ownership even over the objection of creditors. The baseline economic requirement for Subchapter V plan confirmation is that creditors receive at least the value of the business’s projected “disposable income” over a period of three to five years, and not less than creditors would receive in a chapter 7 liquidation.
The cost of small-business Chapter 11 cases are dramatically reduced because Subchapter V eliminates: (i) the requirement that a separate disclosure statement be prepared and approved before voting on the Chapter 11 plan; (ii) the risk of a creditors’ committee being appointed absent cause; (iii) the risk of a competing Chapter 11 plan being filed by creditors; and (iv) the obligation to pay quarterly fees to the United States Trustee, the federal watchdog that oversees bankruptcy cases.
Subchapter V is strictly voluntary and must be affirmatively elected. A company makes its election when the case is filed, or within 14 days after an involuntary case is filed.
To qualify, businesses must meet two criteria. First, the total amount of secured plus unsecured debt may not exceed $7.5 million, counting only noncontingent, liquidated, and non-insider debt. Second, at least half of the debt that is counted must have arisen from the debtor’s commercial or business activities.
Importantly, the debt limit does not count any debts owing to the owners or other insiders, such as family members, nor does the debt cap count any contingent debts, such as potential environmental claims, or debts that have not been liquidated and remains unfixed in amount, such as commercial tort claims.
Only the company’s owner may file a plan in a Subchapter V case; there are no creditor plans permitted. The plan must be filed within 90 days of the petition date, unless the Bankruptcy Court in its discretion grants more time, and the company is free to amend its plan any time before the plan is confirmed. There is no deadline by when the company’s plan must be confirmed. While the company’s plan must be filed in good faith, ownership’s control over the plan deprives creditors of the strategic leverage of potentially offering a “competing plan” or otherwise seeking to end the company’s exclusive right to file a plan.
In light of some analyses showing that as many as half of all Chapter 11 cases filed last year would have been eligible to use this new Subchapter V had it existed, and the economic wreckage of COVID-19, this new subchapter is likely to have a substantial positive impact on Chapter 11 proceedings in the near term. Companies need to act quickly though as the debt cap is scheduled to fall back to under $3 million in early 2021 unless Congress acts to extend this opportunity for small business.
As always if you are facing further questions about small business bankruptcy in this time of COVID-19 consider contacting the law offices of Nick Del Pizzo. Whatever your legal need is, we are there for you, seven days a week. Your case becomes our cause, and we will seek the best resolution possible.
About The Law Offices of Nicholas J Del Pizzo
The burden of overwhelming debt can be too much for anyone to handle. That is where we come in to help. At The Law Offices of Nicholas J. Del Pizzo, III P.A. in Baltimore, our knowledge of and experience with bankruptcy law can help you get that fresh start by wiping out your debts, reorganizing your finances or saving your home. To learn more about how we can represent you as your Dundalk bankruptcy lawyer please contact us today.