This past year has been difficult for many businesses who have barely managed to stay afloat during these turbulent times, and who are looking at more uncertainty ahead as prior relief packages are set to expire. While an additional relief package is being discussed, the content and fate of the package are uncertain. The next relief package may extend some of these programs. However, there seems to be little appetite to keep the elevated debt limit to qualify as a “small business” under the new Subchapter V – Small Business Bankruptcy – provisions of the Bankruptcy Code.
The CARES Act temporarily allowed for small businesses with up to $7,500,000 in liabilities to reorganize under the relaxed standards of Subchapter V. However, unless the law changes again, this debt limit will go back to $2,700,000 on March 27, 2021. A Subchapter V is a streamlined and affordable solution to reorganizing debts when compared to a traditional Chapter 11. A small business, under Subchapter V is allowed to:
- Reorganize debts quicker and cheaper than a traditional Chapter 11;
- Avoid a costly and time-consuming disclosure statement unless court-ordered to provide;
- Propose a payment plan, generally three to five years in length;
- Retain equity holder interest in the business and avoid the absolute priority rule;
- Avoid costly United State Trustee Fee; and
- Modify leases and mortgages.
The above is a non-exhaustive list of the benefits for small businesses with between $2.7 and $7.5MM in liabilities set to expire in March. Small business owners considering bankruptcy should not assume that the next COVID-19 relief package will extend this deadline.