Bankruptcy Simplified – Sub V Chapter 11

The Small Business Reorganization Act of 2019’s new Subchapter V for small businesses was timely, just one month before COVID-19 turned the economy upside-down. But the value of Sub V’s simplified reorganization process was severely limited by its $2.7 million debt cap.

The CARES Act increased the debt cap to $7.5 million on March 26, 2020. However, this temporary increase expires in late March 2022, when the debt cap will return to $2.7 million.

Given the Benefits of Sub V and the Pending Debt Cap Reduction:

Lenders:  Review your portfolios before year-end for clients who may benefit from Sub V.

Companies:  If you are considering a restructuring, evaluate whether or not your might be a candidate for Sub V.

Who’s a Candidate for Sub V?

Debtors with the following characteristics are good candidates for Sub V:

1. Up to $7.5 million in 3rd party secured and unsecured debt (excluding contingent debt and debt owed to principals and/or affiliates)
2. Continuing negative cash flow, despite stable or improving business climate
3. Collateral equals or exceeds secured debt obligations
4. Unfavorable active executory contracts (e.g. leases)
5. Subordinated creditors threatening legal action due to noncompliance
6. Management team capable of operating the business and making improvements while supporting a Sub V Chapter 11 restructuring

What are the Benefits of Sub V?

Sub V’s simplified process benefits both lenders and companies. It is more efficient and cost effective than traditional Chapter 11 thanks to:

1. No outside creditors committee
2. No disclosure statement required
3. No competing plans allowed
4. Elimination of absolute priority rule, allowing ownership to remain in place after restructuring

We recently completed a Sub V restructuring in less than 7 months:

>> Sub V Restructuring for menswear retailer Patrick James

To learn more,  contact Mike Bergthold.