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Introduced in 2019, Subchapter V of Chapter 11 of the Bankruptcy Code (11 U.S.C. Section 1181 et seq.) has been an invaluable tool for lawyers advising financially troubled small businesses. It provides a streamlined, cost-effective process for reorganization. Where it applies, Subchapter V has been a great success. But, much of that success was due to a temporary change to the law that allowed more companies to qualify for Subchapter V treatment. That change has now expired, taking with it the only viable avenue for many businesses to reorganize.
Bankruptcy practitioners have long recognized that traditional Chapter 11 reorganizations are too complicated, too lengthy and too expensive for any but the largest businesses. Small, generally family-owned, businesses were simply priced out of the process. To remedy this, Subchapter V made some key changes to the Bankruptcy Code to make the process more efficient in smaller cases.
Eligibility for Subchapter V is limited. The debtor, which can be an individual or an entity, must be engaged in business or commercial activity and at least half of its debts must be from that activity. Public companies and their affiliates are ineligible as are entities that primarily hold a single real estate asset. The biggest limitation, however, is the amount of debt owed.
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