Subchapter V Bankruptcy: 7 Rules That Make It Different From Chapter 11

Subchapter V is technically just an appendix of Chapter 11 that was added to bankruptcy laws to make reorganizing smaller businesses easier. They both let you keep running your business, get the automatic stay, restructure secured debt, file to assume or reject contracts, sell assets and confirm a plan. The big differences are in things like eligibility, procedure, and cost.

Seven Special Rules

This subchapter comes with seven special rules that make it easier to reorganize. The first is a strict eligibility limit. Only you can file a plan. You will have less paperwork to file, and no quarterly fees. In addition, a new trustee will show up in every case, and you can get confirmation over the objections of creditors, with a discharge that comes later.

The first rule on subchapter V reorganization is who it’s for. Qualifying as a ”small business debtor” means you can make use of the streamlined approach to bankruptcy. Total debts need to be no more than $3,424,000. At least half of that needs to come from the operation of the business, and any loans from insiders or affiliates don’t count toward the total. There are more rules than these, but they tell you if you can try this approach.

You can’t use this fast-and-easy small-business bankruptcy if you’re in the business of owning a single piece of real estate. Neither can companies that file public reports with the SEC or their affiliates. Congress passed a bill that would permanently raise the debt limit to $7,500,000, for cases filed after it becomes law. That bill is awaiting the president’s signature.

While the debtor has control of the plan in Chapter 11, others may intervene once the exclusivity period ends, and force a choice between rival plans. That doesn’t happen in a subchapter V case. There, only the debtor gets to file a plan, and within a ninety day window. If the delay is not your fault, that deadline can be extended. The point is to help you stay in control. Your plan has to meet the standards laid out in the Bankruptcy Code, though. In a subchapter V case, a status conference must be held within 60 days. You must file and serve a report of your efforts to reach a plan that all the creditors agree to. That gets done at least 14 days before the mandatory hearing.

In a Subchapter V bankruptcy, a trustee is appointed in every case, to help reach a consensual plan of reorganization, while the owner keeps running the business. This bankruptcy trustee normally takes part in key matters but does not run the estate. That’s a job for the company and its management. That is different from a regular Chapter 11, where there is usually no trustee unless the judge orders one.

The fourth special rule for subchapter V is that there is less paperwork involved than in a regular Chapter 11. In a subchapter V case, there’s no need to file a separate disclosure statement as in regular Chapter 11, unless the court orders it. Another thing you get to skip is the appointment of a committee of unsecured creditors, unless the court orders otherwise.

The fifth special rule of subchapter V is that you can often keep court costs down. The U.S. Trustee will not charge Subchapter V cases the same quarterly fees that are typical in regular Chapter 11s. You will still have to pay the $1,738 court filing fee, though.

The sixth rule, the big one: Under the absolute priority rule that’s usually needed to confirm a plan, creditors get paid before the owners do. That rule makes it hard for owners to hold on to the business when they filed Chapter 11. In a Subchapter V reorganization, you can get a plan confirmed over creditor objection if its requirements are met. So you have a better chance to keep your business. One of the main reasons Subchapter V can be attractive is when the owners need to stick around to make reorganization work. The catch to getting a plan confirmed over the objections of the creditors, is that you have to commit all your projected disposable income to paying off the bankruptcy debt, for a period of three years, dating from the first payment. The court has the power to extend that period, up to five years.

The seventh special rule, which is the exit path: In a nonconsensual subchapter V case, you only get your discharge at the end of your three-year payment plan, or a longer one of up to five years if the court sets it. Three federal appeals courts have already ruled on the scope of that discharge: Plans of reorganization that do not require the agreement of the creditors don’t protect a reorganized company against section 523(a) claims.

Which Type of Chapter 11 to File

This is a business decision, and there are good reasons for a company to try the streamlined approach, or to try the regular Chapter 11. Small or Subchapter V reorganization is not always better. Your goals, the size and complexity of the case, and how much secured debt you have to deal with are the big factors to consider when deciding which type of Chapter 11 to file.