September 12, 2022

The American Bankruptcy Institute once observed that “[a] robust, effective, and efficient bankruptcy system rebuilds companies, preserves jobs, and facilitates economic growth with dynamic financial markets and lower costs of capital.” These ideals have not been the reality for many small-business debtors in financial distress, who have historically been forced to reorganize under Chapter 11, Chapter 7, or Chapter 12 (if the debtor was also a family farmer).

Chapter 11 appears to be a viable option for small-business debtors because it provides debtors the opportunity to continue operating their businesses while reorganizing their financial affairs. Therefore, Chapter 11 theoretically allows debtors to rebuild their business, maintain staff, and regain financial strength. However, a traditional Chapter 11 proceeding can prove cumbersome and expensive for small-business debtors. Realizing the shortcomings of Chapter 11 and the bankruptcy system generally as-applied to small-business debtors, Congress enacted the Small Business Reorganization Act (SBRA). Advantages under the Small Business Reorganization Act The SBRA was enacted on August 23, 2019 and became effective on February 19, 2020. Through its enactment, the SBRA added Subchapter V to Chapter 11 of the Bankruptcy Code with the intent to make bankruptcy proceedings faster, simpler, and more affordable for small businesses while retaining the Chapter 11 tenet that the debtor may continue operating its business.

As an example, Subchapter V cases do not require a quarterly fee to be paid to the U.S. trustee, which is otherwise required in Chapter 11 proceedings. 28 U.S.C. § 1930(a)(6). Moreover, although the U.S. trustee will appoint a Subchapter V trustee to oversee and monitor the case, ensure that the debtor makes timely payments, and facilitate the development of a consensual plan, the Subchapter V trustee does not take possession of the debtor’s assets and does not have the power to sell the assets. 11 U.S.C. §§ 1183, 1184, 1186.

The SBRA also eliminates the “absolute priority rule.” This rule may be summarized as requiring “that a dissenting class of unsecured creditors (…) be provided for in full before any junior class can receive or retain any property [under a reorganization] plan.” Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988) (quotation omitted). Practically, the absolute priority rule made it difficult for small-business debtors to get reorganization plans confirmed because it would require unsecured creditors to be paid in full or consent to receive less than full payment. The elimination of the absolute priority rule effectively allows courts in Subchapter V proceedings to confirm plans over the objection of unsecured creditors if all projected disposable income of the debtor will be applied to the plan and the additional statutory conditions are met. 11 U.S.C. § 1191(c). The elimination of the rule also provides greater opportunity for existing owners of the business to retain their ownership interests.

Relatedly, a reorganization plan is typically preceded by a disclosure statement. A disclosure statement contains information for the holder of a claim or interest pertaining to the debtor’s finances. Disclosure statements are not required in Subchapter V cases unless otherwise ordered by the court for cause. 11 U.S.C. § 1181(b). The elimination of this requirement also helps streamline the bankruptcy process for small-business debtors.

Eligibility under the Small Business Reorganization Act
In order to be a “debtor” under Subchapter V, and therefore be eligible to reorganize under Subchapter V, there are four primary requirements:

  1. the debtor must meet the definition of a “person” under the Bankruptcy Code;
  2.  the debtor must be “engaged in commercial or business activities”;
  3. the debtor’s aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief must not exceed $7,500,000.00 (excluding debts owed to 1 or more affiliates or insiders); and
  4. at least 50 percent of the debtor’s debts must have arisen from its commercial or business activities. 11 U.S.C. § 1182(1)(A). Note that the term “person” includes individuals, partnerships,
    and corporations (but not governmental units unless additional criteria are met). 11 U.S.C. § 101(41).

It should also be clarified that the original debt limit under Subchapter V was $2,725,625.00, but on March 27, 2020, the federal CARES Act increased the debt limit to $7,500,000.00 for a period of one year. The increase was later extended through March 27, 2022 by the COVID–19 Bankruptcy Relief Extension Act of 2021. Since then, the increased debt amount reverted to $2,725,625.00, or $3,024,725.00 to adjust for inflation, until ultimately increasing again to $7,500,000.00 with the passage of the Bankruptcy Threshold Adjustment and Technical Corrections Act on June 21, 2022. The latest increase of the debt limit sunsets on June 21, 2024, which significantly expands the opportunity for debtors to utilize Subchapter V.

To summarize, the SBRA addressed several of the Bankruptcy Code’s shortcomings with respect to small-business debtors. This article has articulated some key advantages of Subchapter V and the primary eligibility factors. Assuming the debtor qualifies, Subchapter V of Chapter 11 could provide an efficient and costeffective mechanism for reorganization.

1 American Bankruptcy Institute Commission to Study the Reform of Chapter 11: 2012-2014 Final Report and Recommendations, 23 Am. Bankr.
Inst. L. Rev. 1, 4 (2015).