How the Subchapter V of Chapter 11 Bankruptcy May Help Your Struggling Small Business

The COVID-19 pandemic of 2020 hit the world hard. Even now, months into the new year, many people and businesses are still recovering. Many more will never recover, left with no option but to close their doors or permanently change the way they operate. 

Even if your business was not directly impacted by the global pandemic with a loss of consumers or clients, you probably still felt the effects. People had much less money to spend. Consumers were not leaving their homes to engage with local businesses. Companies had to spend more to ensure consumer and client safety or to overhaul their daily operations to meet new guidelines. It has all added up to a financial situation that has left many companies crushed beneath its weight. 

If this sounds like the situation your small business finds itself in now, you may be wondering what you can do. You have tried to hold on through the toughest of times, done your best to innovate despite endless challenges, and it still has not been enough to keep your company profitable! What options are left? If you are hoping to find a way to stay in operation while working through the mountains of debt that you have accrued over the last year and a half, it may be time to consider bankruptcy

Why Choose Bankruptcy?

When people hear the word “bankruptcy”, it often carries extremely negative associations. They think of financial mismanagement. They think of a worst-case scenario. Indeed, bankruptcy can be part of these scenarios, but more often, it is part of the solution for individuals and companies alike who have fallen onto hard times.

No one would say that the financial difficulties most companies are still struggling with right now are those companies’ faults. Rather, they are the result of an unavoidable economic downturn that people around the world have experienced. As such, it should not be any wonder that so many people are seeking relief through measures like bankruptcy – and it should not bring any shame to those people, either. 

Bankruptcy is a way to eliminate or reorganize debt that would otherwise be unmanageable. For many people – both individuals and businesses – this is the situation they have found themselves in lately. Their debt has reached levels that are simply not manageable anymore, especially with the leaner margins that many are currently operating with. Choosing bankruptcy is a way to attack that debt sensibly, while in many cases keeping the lights on for owners and employees and the service flowing for consumers and clients. 

There is nothing wrong with finding an option that works for your business when it comes to debt relief. There is nothing wrong with prioritizing that debt relief in troubling economic times, and there is nothing wrong with doing that through well-planned and executed bankruptcy. For more information on why your company might want to consider bankruptcy, discuss your options with a bankruptcy attorney.

Opting for Bankruptcy and Choosing the Right Chapter

Okay, so you know that bankruptcy might be your business’s best option moving forward – but what kind of bankruptcy is the right choice for you? Luckily for many small business owners, an adjustment that was made to the US bankruptcy code in 2019 went into effect in 2020 – during the height of the pandemic – and changed the options available for companies who were struggling with debt. That change brought about the subchapter V of chapter 11 – but before we get to that, let’s discuss the various options that were available to companies before this change went into effect. 

Initially, there were two primary bankruptcy chapters available to businesses. These included:

  • Chapter 7 – This type of bankruptcy is also called a “liquidation” bankruptcy. It is chosen by businesses that no longer wish to operate or who are not viable any longer. The downside of this option is that all business assets must be sold to compensate for debts accumulated. The upside? Business owners will leave the discharge of this form of bankruptcy completely free of debt.
  • Chapter 11 – This is the chapter of bankruptcy that is chosen when a business wants to remain operational but is struggling to pay down debts. Also called a “reorganization” bankruptcy, it focuses on doing just that- reorganizing the debt into a more manageable payment schedule to allow the company and its owners to gradually repay the amount owed while keeping their doors open.

Both types of bankruptcy provided what is known as an automatic stay. This prevented creditors from being able to personally pursue the business or its owners for debts owed. This is and always has been one of the biggest benefits when choosing bankruptcy over other debt-relief options, as getting “out from under” the constant presence of debt collectors in your life can be a huge relief. 

Subchapter V of Chapter 11 Bankruptcy – A Boon for Small Business

For many businesses, chapter 11 is the best choice. For businesses who owe $2.75 million or less – and who have accumulated at least 50% of that debt through business activities – the subchapter V of chapter 11 is an even better option. Sometimes called “chapter five” bankruptcy, this subchapter is a recent addition to the bankruptcy code that brings big benefits to filers. 

Why should you opt for the subchapter V of chapter 11 bankruptcy?

Here are just a few of the benefits:

– You can continue to operate your business while you are going through the bankruptcy process. 
– You do not need creditor approval, unlike a traditional chapter 11 bankruptcy.
– You are the only one who can submit a reorganization plan. Your creditors cannot submit one on your behalf, which is different from the way a traditional chapter 11 bankruptcy works. 
– Unlike the upfront payment demanded for administrative expenses in a traditional chapter 11, a subchapter V bankruptcy allows you to pay down these expenses in installments. This is a great benefit for smaller businesses that may not be able to afford a large, lump-sum payment. 

Sound like a good plan for your struggling small business? For more information – and to find out if your business qualifies for this type of bankruptcy – contact the legal leaders at the Van Horn Law Group. Our team of experienced professionals can help you navigate the process the get the best possible result. 

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Published by
Chad Van Horn

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