Is Subchapter V Bankruptcy the Right Solution for Your Small Business?

Subchapter V Bankruptcy

The Wall Street Journal (Becky Yerak) published an article on 04.23.24 titled “Small-Business Bankruptcies Surge Ahead of Potential Law Change,” explaining that small business bankruptcy is on the rise as business owners rush to take advantage of a soon-to-expire Subchapter V provision. We’d like to take this opportunity to provide a deeper understanding of Subchapter V bankruptcy to help you determine if it’s the right solution for your business.

Understanding Subchapter V

Subchapter V is a provision of the Small Business Reorganization Act of 2019, which became effective in February 2020. It offers a more straightforward way for small businesses to reorganize under Chapter 11 bankruptcy. This subchapter aims to make the bankruptcy process faster and less expensive by eliminating the need for a creditors’ committee and reducing administrative burdens. It also allows business owners to retain control of their operations and equity, even if debts aren’t fully paid, providing a better chance for business survival and recovery. It was initially for companies with less than $2.7 million in debt. However, the eligibility threshold increased to $7.5 million due to hardships small businesses faced during the COVID-19 pandemic. While Subchapter V offers faster bankruptcy resolution and better control for owners, it’s important to note that some argue it disadvantages creditors.

Impending Changes   

Subchapter V is not disappearing, but a significant provision will change. The temporary increase in the debt eligibility threshold to $7.5 million will end on June 21, 2024. If Congress doesn’t extend the higher cap, the debt eligibility threshold will revert to its original lower limit, adjusted for inflation, which is approximately $3 million. This change could significantly reduce the number of small businesses eligible to file under Subchapter V, potentially making it less accessible for those with higher debt levels.

Surging Small Business Bankruptcy

Small business bankruptcies are surging, in part, due to businesses rushing to take advantage of Subchapter V before they become ineligible when the threshold reverts. According to the U.S. Department of Justice, 7,442 companies filed for bankruptcy under Subchapter V as of February, many of which would not have been eligible had the threshold not increased. Filing now allows them to benefit from the streamlined process and cost savings of Subchapter V while they still qualify, helping them manage debts and stay afloat.

Subchapter V Guidance from The Law Offices of Ronald I. Chorches

Deciding whether your small business should file for Subchapter V can be a critical decision during financial distress. With the current economic challenges, including pandemic loan repayments and rising interest rates, Subchapter V can provide the lifeline your business needs. However, if this is something you’re considering, it’s time to act now to secure these benefits while you still qualify. Contact The Law Offices of Ronald I. Chorches to arrange a free consultation to discuss your bankruptcy options. We can help you evaluate your options and determine if Subchapter V is the right path for your business.   

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