As a small business owner, you may have begun your career envisioning a future of passive income, exponential growth, and a lasting legacy.
However, no one could have ever predicted the COVID-19 pandemic, and the resulting economic devastation of the complete shutdown of our economy. While there is talk of "restarting" the economy on a limited basis, and in addition the Government is trying its best to support businesses and individuals alike, it may not be enough.
Unprecedented in living memory, the COVID-19 pandemic may force even small businesses that were on fundamentally sound footing just a few short weeks ago to now explore many different avenues, including Chapter 11 Subchapter V, to address pressing debt concerns.
Normally, businesses of any size are ill-advised to enter Chapter 11 without a well-planned business exit strategy; however, the COVID-19 crisis may be the exception to that rule. Newly enacted Subchapter V may allow small businesses to delay paying on their obligations for long enough to provide critical time to negotiate more reasonable terms with lenders, landlords, and/or other creditors. This would also provide time to apply for emergency loans and to also to seek other relief made available by federal, state and local government authorities, with the goal of– hopefully – resuming normal operations once the immediate health emergency subsides.
If you are having issues with a Merchant Cash Advance ("MCA"), we are one of the few, if not only, law firm in Massachusetts and Connecticut that defends MCA threats and lawsuits; please see our site page on Merchant Cash Advances, and our blog posts below:
- Merchant Cash Advances In Massachusetts - Predatory Loans That Prey Upon Small Businesses
- Why Small Business Owners Should Think Twice Before Getting a Merchant Cash Advance
Understanding the Chapter 11 Bankruptcy Update: Subchapter V
- INSIGHT: Small Businesses Get Break From Chapter 11 Burdens - Bloomberg Law, March 5, 2020
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 more 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 be able 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 designated 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:
- 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.
- 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.”
- 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.
- 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.
- 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. However, the National Bankruptcy Conference – which had advocated a significantly higher cap of $7,500,000 even before the COVID-19 crisis – recently renewed its calls for a $7,500,000 cap in correspondence to Congressional leaders, arguing that the higher cap would benefit not only small business owners, but also their creditors, suppliers, customers, employees, and the overall economy. [Update: Congress has temporarily increased the cap to $7,500,000 until the end of year 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed on March 27, 2020.
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.
As we continue to monitor the novel coronavirus (COVID-19), we are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors.
Contact us online to schedule your initial consultation or call our firm directly at (888) 400-9318 today.