For many businesses facing financial difficulties, Chapter 11 bankruptcy is a tool that allows them to restructure, reorganize and relieve themselves of the burden of their debt through careful planning and setting the business back on the path to profitability. In 2019, Chapter 11 bankruptcy was reformed with a new Subchapter V, which provides a new option for businesses to make the process simpler and reduce the financial barriers.
Modern reform: The Small Business Restoration Act of 2019
When the Small Business Restoration Act was passed in 2019, the goal behind the law was to empower debtors to take greater control over their bankruptcy cases. The law had three primary benefits:
- The absolute priority rule was modified, allowing debtors to continue to own and operate their businesses while paying debtors from their disposable income.
- Rather than a committee of creditors being appointed to review any restructuring plans, the court appoints a bankruptcy trustee to oversee the case.
- Only the debtor submits a restructuring plan, creditors are not permitted to offer competing plans.
These changes offer debtors a significantly more affordable bankruptcy process that is designed to help them get back to profitability and save their company.
Business owners are quickly taking advantage of this new process
For many business owners in Florida, the new Subchapter V bankruptcy process has become a lifeline to businesses throughout the economic difficulty of recent times. Florida leads the way with the highest number of businesses taking advantage of this new financial relief, with 234 cases alone filed in 2022, much more than the 148 in the next closest state.
This positive response to the new option is in part due to the increased eligibility limits. When initially passed, the law provided relief only to debtors with less than $2.73 million in outstanding debt. However, that limit has been raised to $7.5 million under the Coronavirus Aid, Relief and Economic Security Act of 2020. This was then extended to 2024.
Bankruptcy seekers should seriously consider whether a Subchapter V bankruptcy is a better alternative than a traditional Chapter 11 bankruptcy restructuring. Subchapter V has much tighter deadlines and can require a more hands-on approach for debtors, however, it does offer a more affordable option while keeping their business in their hands.