business

Does My Business Qualify for Subchapter 5 Relief?

Many businesses, particularly small ones, have fallen on hard times since the beginning of the COVID-19 pandemic. Ever since the outbreak, there have been many different options for relief.

One such option is an addition to Chapter 11 bankruptcy, specifically Subchapter 5. Subchapter 5 was added to Chapter 11 of the U.S. Bankruptcy Code in 2019, just before the COIVD-19 outbreak to make business bankruptcies easier and less expensive. Many small business owners have since used it to relieve their debt.

In this article, we will briefly discuss how Subchapter 5 of Chapter 11 bankruptcy works. This will help you determine if your business qualifies.

What Is Chapter 11 Bankruptcy?

Chapter 11 is a way to keep your business running while you lower your debt. Unlike other forms of bankruptcy, which wipe debt clean and force the business to shut down, Chapter 11 helps the business repay what it owes.

Often, businesses in debt are caught in a cycle. They must both keep up with their debt payments and try to funnel money into the business. This normally forces them to choose one over the other. If they focus on paying back their debt, they may not have enough leftover to keep the business moving. If they focus on the business, they miss debt bills or pay them late, acquiring fees and digging themselves further into a hole.

When you file for a Chapter 11, the court appoints a trustee to oversee your case. They will help you reorganize your payments. You must propose a payment plan to them, which they can either accept or reject. If they reject it, you can try again.

The trustees can help negotiate a new payment plan with your creditors. When the new plan is approved, you should be able to pay back your creditors within three to five years. Chapter 11 allows you to remain in business, as the entire goal is to repay debt, not eliminate it.

Subchapter 5 Provisions

Subchapter 5 creates a smoother, easier process for business owners who file for Chapter 11. It allows the court to appoint the aforementioned trustee, and it empowers the debtor to propose their repayment plan. The subchapter also bypasses an unsecured creditor’s committee, allowing an easier repayment of this debt.

It also eliminates the need to give a “new value,” which can help you pay your loans more quickly. Homes that were not purchased with these business loans may be safe from repossession as well.

Subchapter 5 Requirements

Most obviously, Subchapter 5 is for businesses only. Some creative people have used it for their personal finances, but this is a complicated process and won’t apply to most people.

Next, there is a limit to Subchapter 5’s benefits. Initially, the plan was only for businesses that had accrued a debt of $2,725,625 or less. Since the pandemic, however, the CARES act raised that limit. Subchapter 5 now applies to businesses that are $7.5 million in debt or less.

If your business is deep in debt, don’t lose hope. Our team may be able to help you file for Chapter 11, helping you repay your loans and rebuild your business. For a free consultation, call us today at (904) 478-9255 or contact us online.