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How Can Small Businesses Resolve Their Debt?

As a small business owner, you may have begun your career envisioning a future of passive income, exponential growth, and a lasting legacy. If, however, you have found yourself struggling to pay your bills or overcome your debt, you are not alone. Millions of Americans owe billions of dollars in credit card debt and loans, and many feel there is no end in sight.

For middle-class consumers and business owners, online installment loans are a relatively new phenomenon with long maturities and high-interest rates. In fact, many debtors spend the first 18 months making payments that go exclusively to interest. Currently, Americans owe subprime lenders $50 billion in online installment loans.

The merchant cash advance is another form of debt that is particularly treacherous for small business owners. While they don’t charge interest, lenders do collect additional margins and often require collateral. They collect payments directly from your business transactions on a daily basis.

When looking to resolve debt, small business owners have a few options. U.S. Bankruptcy Code outlines multiple chapters of bankruptcy geared toward different types and levels of debt.

Understanding the Chapter 11 Bankruptcy Update: Subchapter V

Filing bankruptcy under Chapter 11 of the United States Bankruptcy Code is a form of debt reorganization similar to Chapter 13 bankruptcy, but it is typically geared toward businesses instead of individual consumers. Corporations, sole proprietorships, and partnerships use Chapter 11 bankruptcy to continue operating while they restructure their finances, establish a contract with their creditors, and possibly downsize. When a business files Chapter 11 bankruptcy, creditors vote on whether they will allow this reorganization.

Traditionally, this form of bankruptcy has been more expensive and time-consuming than Chapter 7 or 13. Some businesses must file Chapter 11, however, because they don’t want to liquidate their assets (as would be the case with Chapter 7), and/or they have too much debt to reorganize into a manageable 3-5 year plan required by Chapter 13.

Effective on February 22, 2020, however, the Small Business Reorganization Act of 2019 designates Subchapter V within Chapter 11 Bankruptcy as the way in which certain small businesses will reorganize their debt.

If you are a small business owner considering filing bankruptcy, here are 5 key elements of Chapter 11 Bankruptcy, Subchapter V to keep in mind:

  1. The goal is to minimize the time and cost of debt reorganization. The procedure establishes deadlines for holding conferences and filing reports/reorganization plans. Generally, all initial processes must be completed within a few months.
  2. You will now be allowed to propose a plan. Like farmers and fishermen under Chapter 12 and consumers under Chapter 13, you will not need to solicit plan acceptances from creditors under Subchapter V. The court overriding creditor objections in this way is referred to as “cramdown.”
  3. Subchapter V allows for mortgage modification in certain circumstances. Small business debtors who used a mortgage loan for their primary residence in connection with their business can modify consensual liens on the mortgaged property. For example, if you borrowed against the equity in your home for business investment purposes, you could potentially lower the mortgage interest rate, extend maturity, or even strip the lien entirely.
  4. Subchapter V combines Chapter 11 and Chapter 13 concepts. You will need to use all of your projected disposable income or equivalent property to make payments, and the plan will range from 3-5 years. You will also be required to demonstrate a reasonable likelihood of completing the payment plan, and certain assets will be liquidated if you fail to make payments.
  5. You may not qualify as a small business debtor depending on your debt. For the court to consider you a small business debtor, your debt cannot exceed $2,725,625. Some organizations are pushing Congress to raise this debt limit to allow more businesses to take advantage of Subchapter V, but legislators have not yet proposed a change.

What Does the Court Consider Disposable Income?

When the court arranges a repayment plan, it is not required to adhere to the demands of creditors. However, the court will reorganize your debt in a way that will use all your disposable income.

Disposable income is anything you receive that is not needed to:

  • Support yourself or your dependents;
  • Maintain domestic support obligations that become first payable after you file; or
  • Preserve or continue your business operations.

Subchapter V of Chapter 11 Bankruptcy is not the only way small business owners can resolve their debts. Depending on the amount of debt you owe and the assets you want to keep, Chapter 7 or Chapter 13 bankruptcy may be appropriate options for your situation.

Are You Struggling to Pay Off Debt As a Small Business Owner? Call Our Firm Today.

At Glenn F. Russell Jr. & Associates P.C., our attorney has over a decade of experience helping Massachusetts clients attain debt relief through bankruptcy. Because our team understands that every situation is unique, we will take the time to listen to your situation and help you find the most appropriate path toward financial security. If you are struggling as a small business owner to manage overwhelming debt, we are ready to provide the support you deserve.

Contact us online to schedule your initial consultation or call our firm directly at (888) 400-9318 today.