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If you own a New Jersey business with less than $7.5 million in qualified debt and you are considered filing for bankruptcy protection, time is running out to file under Subchapter 5. With the continuation of the COVID-19 pandemic, many small businesses are struggling with lockdowns and other government restrictions on business operations. Bankruptcy protection may be the only option to either preserve your business as a viable ongoing concern or to protect personal and family assets. 

But a March 27, 2021 deadline is quickly approaching. These are dark times for financially stressed New Jersey businesses and it is important to consult with experienced New Jersey bankruptcy attorneys, like those at Silverberg Law, LLC, for advice and counsel on potential legal options.

What is a Subchapter 5 small business bankruptcy?

In 2019, Congress passed the Small Business Reorganization Act (“SBRA”) — 11 U.S.C. §§ 1181 et seq. The SBRA created a new type of bankruptcy proceeding designed for small businesses as an alternative to costly and time-consuming Chapter 11 bankruptcy proceedings. These are known as Subchapter 5 filings.

Originally, businesses with no more than $2,725,625 in aggregate secured and unsecured debts were eligible to file under Subchapter 5. However, in March 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act to counteract the financial devastation caused by the COVID-19 pandemic. In that legislation, the debt limit for eligibility under Subchapter 5 was increased to $7.5 million which greatly expanded the number of businesses which could take advantage of the new type of bankruptcy proceeding. However, the eligibility extension was only granted for a year and is set to sunset on March 27, 2021. The sunset also applies to any business seeking to convert a currently-pending Chapter 11 proceeding into a Subchapter 5 proceeding.

What are the advantages of a Subchapter 5 filing?

A Subchapter 5 proceeding provides three significant advantages to New Jersey small business owners.

First, under Subchapter 5, it is easier for owners to retain their equity interests — ownership — of the small business through the reorganization process. Under a traditional business bankruptcy reorganization under Chapter 11, it is difficult for owners to retain their ownership unless they pay creditors in full, obtain creditor approval or are able to add significant “new value” to the business. Under Chapter 11, this is known as the “absolute priority rule.” That rule is eliminated for Subchapter 5 filings as long as the reorganization plan uses all “extra” income to pay creditors through the term of the plan and that it treats creditors equally and fairly. 

Second, in a Subchapter 5 case, Creditor Committees are eliminated. This has the effect of streamlining the process and expediting the approval of the reorganization plan. Since there are no creditor committees, the court can approve the reorganization plan without the consent/approval of the creditors. This saves costs and expenses since there is no extended “back-and-forth” with the creditors to gain their approval. Taken together, these features of a Subchapter 5 bankruptcy means that a New Jersey small business progresses through the approval process quicker and finishes its reorganization plan quicker. Plan approval under Chapter 11 often takes a year or more; under Subchapter 5, approval can often be accomplished in half the time. Speed may be the difference between business success or failure.

Finally, importantly to many business owners, Subchapter 5 allows the bankruptcy court to modify certain residential real estate mortgage loans if (i) the loan was not a purchase money mortgage loan and (ii) if more than half of the loan was used to fund business expenses.

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. We have 30 years of experience helping small businesses in New Jersey and New York. We provide aggressive, hands on representation in all matters we handle. Use our “Contact Us” link or call (201) 252-7000 to schedule a free consultation.