Subchapter 5 bankruptcies are a relatively new type of bankruptcy proceeding created by the Small Business Reorganization Act (“SBRA”) — 11 U.S.C. §§ 1181, et seq. The SBRA was passed by Congress in late 2019 and became effective in mid-February 2020. Subchapter 5 bankrupcties are designed for “small business debtors” and are a subchapter to Chapter 11 of the Bankruptcy Code. Under the original legislation, a “small business debtor” was defined as a debtor engaged in commercial or business activities with no more than about $2.7 million in debts with at least one-half of those debts being related to the business activities of the debtor. However, because of the COVID-19 pandemic, the debt limit was raised temporarily to $7.5 million. See 11 U.S.C. § 101(51D)

Subchapter 5 was designed to provide an alternative to a full Chapter 11 bankruptcy for small businesses. Chapter 11 bankruptcies have procedural and cost burdens that make it difficult for many small businesses to survive Chapter 11 as viable ongoing business concerns. Subchapter 5 streamlines the process and eliminates many of the most costly features of a typical Chapter 11 bankruptcy. As with a Chapter 11 bankruptcy, the owners of the small business retain control of the day-to-day operations under Subchapter 5. The important differences can be summarized as follows:

  • Under Subchapter 5, no detailed disclosure statement is required — typically, Chapter 11 disclosure statements are very costly to prepare and require the court’s approval; under Subchapter 5, the debtor need only provide a business history and liquidation and feasibility analyses as part of the reorganization plan
  • If approved by the court, owners can retain ownership in the small business without making a “substantial contribution” to the creditors — the legal criteria is that the reorganization plan be “fair and equitable” and that it treats creditors equally and fairly (11 U.S.C. § 1191(b))
  • Only a bankruptcy trustee is appointed to administer the reorganization plan under Subchapter 5 — this save expenses and streamlines administration of the case; Trustee exercises oversight authority and administers payments remitted by the debtor under a confirmed reorganization plan
  • Costs of administration (like Trustee’s fees) can be paid over the term of the reorganization plan
  • Creditor’s Committees are eliminated unless ordered by the court for cause — this eliminates another costly and time-consuming feature of a typical Chapter 11 bankruptcy since, generally, committee costs and expenses are paid for from the small businesses’ revenue and assets and committee approval for the reorganization plan can be difficult to obtain
  • Reorganization can be approved without the vote of creditors — this shortens the proceedings and, again, saves costs and expenses
  • Under Subchapter 5, creditors cannot submit a reorganization plan (but the plan must be submitted within 90 days of filing) — under Chapter 11, creditors are allowed to submit plans under some circumstances which has the effect of prolonging the proceedings and often leads to competing plans and contested hearings before the bankruptcy judge
  • Under Subchapter 5, some small business owners can seek to modify a residential real estate mortgage if not the loan was not a purchase money loan and if at least half of the mortgage proceeds were for business expenses — modifying mortgage loans in this manner is not permitted under a traditional Chapter 11 proceeding

As can be seen, there are significant advantages to filing under Subchapter 5 for New Jersey small businesses who are in financial distress.

Contact an Experienced New Jersey Small Business Bankruptcy Lawyer Today

For more information or if you are considering bankruptcy protection for your small business, contact the experienced and proven New Jersey Bankruptcy attorneys at Silverberg Law, LLC. When you are searching for an attorney, it is important that you find someone who understands your business and your goals. We have 30 years of experience helping small businesses in New Jersey and New York. Our law practice focuses on business bankruptcies, business law and residential real estate. Use our “Contact Us” link or call (201) 252-7000 to schedule a free consultation.