Approximately one month ago, the Small Business Reorganization Act (“Subchapter 5”) became effective. Subchapter 5 is intended to create an efficient process for a debtor to reorganize and a simpler standard for a debtor to confirm a plan. For those who qualify, Subchapter 5 shortens the time to file a plan, eliminates the requirement of a disclosure statement and ostensibly dispenses with an official unsecured creditors’ committee – all of which is intended to eliminate some of the costs and hurdles in chapter 11 reorganization. As a general matter, a plan will be confirmed in Subchapter 5 if the small business debtor contributes all disposable income for three to five years to make plan payments.

Other features of Subchapter 5 include:

A Trustee is appointed in all cases. 11 U.S.C. § 1183(a)
No means test. Fed. R. Bankr. P. 1007(b)(5)
A Debtor may modify the plan at any time prior to confirmation. 11 U.S.C. § 1193(a)
A Debtor may modify the plan at any time after confirmation but before substantial consummation, or, in a nonconsensual plan, at any time within 3 years but no longer than 5 years after confirmation. 11 U.S.C. §§ 1193(b) and (c)
The plan may modify the rights of a holder of a claim secured only by a security interest in real property that is the debtor’s residence if the new value received with the lien was used primarily in connection with the debtor’s business. 11 U.S.C. § 1190(3)

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act made Subchapter 5 bankruptcy reorganization a potentially even more viable option for small businesses because it increased the debt limit (and therefore expanded eligibility) from $2,725,625 to $7.5 million.

In addition, the CARES Act also modified (albeit it with a one year sunset) Chapters 7 and 13 of the Bankruptcy Code. The modifications are:

Coronavirus-related payments from the federal government are excluded from the analysis of eligibility for Chapter 7 or Chapter 13 income computations.
Similarly, coronavirus-related payments are also excluded from a debtor’s disposable income calculation for purposes of a Chapter 13 plan payment computation.
Chapter 13 debtors may modify their confirmed plan based on a material financial hardship caused by COVID 19, including extending payments for seven years after their first plan payment was due.

Changes made by virtue of the CARES Act to the Bankruptcy Code can be found HERE in pages 77-83.

If you have any questions related to this content, please reach out to me or your Rothberg attorney.

Susan E. Trent, Partner｜[email protected]

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Legal Alert: Bankruptcy and the CARES Act