Navigating Bankruptcy for Small Businesses: The Complexities of Subchapter V

In recent years, small businesses with more than $3 million in debt have been grappling with the complicated process of filing for bankruptcy protection. This is due to the expiration of a type of bankruptcy protection filing known as Subchapter V, which was introduced as part of the Small Business Reorganization Act in 2020.

Initially, small businesses with less than $2.75 million in debt were able to file under Subchapter V, but this threshold was extended to $7.5 million during the pandemic. However, a bill to make this debt limit permanent failed, leading to the threshold revert back to $3 million on June 21. Despite this setback, it’s worth noting that Subchapter V filings have many benefits that make them an attractive option for small businesses looking to navigate the bankruptcy process.

For starters, Subchapter V filings provide shorter deadlines for filing reorganization plans and greater flexibility in negotiating restructuring plans with creditors. Additionally, there is no requirement to pay U.S. Trustee quarterly fees, which can be a significant cost savings for small businesses already struggling financially. Each case appoints a trustee who helps facilitate a reorganization plan with the small business debtor and creditors.

Data from the Justice Department’s U.S. Trustee Program shows that between 2020 and 2023, Subchapter V filers had a higher percentage of plans confirmed by a judge compared to other types of bankruptcy protection filers. Furthermore, Subchapter V filers had a lower percentage of plans dismissed and a shorter time to confirmation, highlighting the advantages of this filing option for small businesses looking for a cheaper and less time-consuming alternative to traditional Chapter 11 bankruptcy filings.

In conclusion, while the expiration of Subchapter V has caused some confusion for small businesses with more than $3 million in debt, it’s important to note that there are still many benefits associated with this type of bankruptcy protection filing option. By providing shorter deadlines and greater flexibility in negotiating restructuring plans with creditors while also saving on fees and reducing court costs compared to traditional Chapter 11 bankruptcy filings