Subchapter V: Simplifying Chapter 11 For Small Businesses
Eligibility
Businesses eligible to file for Chapter 11 Subchapter V bankruptcy must meet specific criteria:
Business Type: The debtor must be engaged in commercial or business activities 12.
Debt Limit: As of June 21, 2024, the total debt limit is $3,024,725 145. This includes both secured and unsecured debts.
Debt Composition: At least 50% of the total debt must arise from commercial or business activities 4.
Exclusions: Single-asset real estate operations are not eligible for Subchapter V 2.
Additional Considerations
Debt Calculation: The debt must be noncontingent and liquidated 3.
Affiliation: Debts owed to affiliates or insiders are excluded from the total debt calculation 3.
Individual Eligibility: Both individuals and entities engaged in business activities can qualify 2.
Recent Changes
The debt limit for Subchapter V eligibility has fluctuated:Originally set at $2,725,625 in 2019
Temporarily increased to $7.5 million due to the COVID-19 pandemic
Reverted to $3,024,725 on June 21, 2024 145This change has made it more difficult for some businesses to qualify, as more than 25% of recent Subchapter V debtors would not meet the lower threshold 1.
Different Plan Requirements
The reorganization plan requirements for Chapter 11 and Subchapter V have several key differences:
Disclosure Statement
Chapter 11: Requires a detailed disclosure statement that provides comprehensive information about the debtor's financial affairs, which creditors review before voting on the plan. 67
Subchapter V: Does not require a disclosure statement. Instead, the debtor must provide a concise history of business operations, a liquidation analysis, and projections showing how they will keep up with plan payments. 89
Timeline
Chapter 11: The debtor has 120 days to propose a reorganization plan, which can be extended up to 18 months. 107
Subchapter V: The debtor must submit a plan of reorganization within 90 days of filing the petition, with a status conference held within 60 days. 89
Creditor Approval
Chapter 11: Requires creditor approval for the plan, with at least one class of impaired creditors needing to accept the plan for it to be confirmed. 107
Subchapter V: Does not require creditor approval for the plan. The court can confirm the plan if it meets legal standards for fairness and equity, and if creditors would receive as much under the plan as they would in a Chapter 7 liquidation. 89
Trustee Role
Chapter 11: The trustee may be appointed to manage the business if the debtor is deemed unfit, but typically, the debtor remains in possession. 7
Subchapter V: A trustee is appointed but does not control the business. The trustee's role is to facilitate the development of a consensual plan and ensure compliance with bankruptcy requirements. 89
Plan Confirmation
Chapter 11: The plan must be confirmed by the court after a hearing, where the court assesses whether the plan meets the requirements of Chapter 11, including feasibility and fairness. 107
Subchapter V: The court confirms the plan if it is fair and equitable, and if creditors would receive as much under the plan as they would in a Chapter 7 liquidation. The plan must also demonstrate feasibility. 89
These differences highlight how Subchapter V provides a more streamlined and efficient process for small businesses compared to traditional Chapter 11 proceedings.
