United States Chapter 5 Bankruptcy Attorneys
Local Lawyers Assisting Small Businesses With Debt Reorganization Plans
Most businesses have a variety of debts and financial obligations. When a company encounters financial problems, it may struggle to pay debts and other expenses, and this can make it difficult to continue operating. In these cases, bankruptcy may provide a business with the ability to address its outstanding debts. While there are different forms of business bankruptcy available, Chapter 11 is the option that is often pursued, since it will allow a business to complete a reorganization and continue operating while meeting its obligations to creditors. Filing for Chapter 11 bankruptcy can be a complex, lengthy, and expensive process, but some small businesses may qualify for a simpler and more streamlined process under Subchapter V of Chapter 11, otherwise known as Chapter 5 bankruptcy.
Requirements for Chapter 5 Bankruptcy
The Small Business Reorganization Act of 2019 took effect in February of 2020, and it provided a new bankruptcy and reorganization process for small businesses with debts totaling less than $2,725,625. The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily increased this limit to $7,500,000. While most small businesses that are within these debt limits can pursue Chapter 5 bankruptcy, businesses that derive income from the ownership and operation of a single real estate asset are ineligible.
The Chapter 5 process is more streamlined and faster-moving than other types of Chapter 11 bankruptcy. While a business will act as a debtor-in-possession, a trustee will be appointed who will assist in the bankruptcy process and ensure that a debtor meets requirements. Within 90 days of filing for bankruptcy, a debtor must file a reorganization plan, and they must also file a balance sheet for the business, a statement describing business operations, a cash flow statement, and applicable federal tax returns. The debtor's reorganization plan must be fair and equitable to all creditors, and it must provide them with at least as much repayment as they would receive if the debtor's assets were liquidated through a Chapter 7 bankruptcy.
Unlike a standard Chapter 11 bankruptcy, a Chapter 5 bankruptcy will not involve a committee of creditors that will vote on whether to approve a debtor's reorganization plan. A plan may be approved even if creditors do not consent to it, as long as it does not unfairly discriminate against any creditors. A debtor will not be required to provide a disclosure statement to creditors, but their reorganization plan will need to include relevant information, including a history of the company's operations, an analysis of the amount that would be generated through the liquidation of business assets, and projections for cash flow that will demonstrate that the debtor will be able to make ongoing payments to creditors.
One option available to debtors in a Chapter 5 bankruptcy is the creation of a repayment plan, similar to the type of plan used in a Chapter 13 bankruptcy. In this type of plan, a business will use all of its projected disposable income to make payments to creditors over a period of three to five years. Administrative expenses may also be included in this plan rather than being paid during the initial bankruptcy filing. If creditors consent to a plan, debts will be discharged once the plan is confirmed. If creditors do not consent, debts will be discharged upon completion of the repayment plan.
Contact a U.S. Chapter 5 Bankruptcy Lawyer
While a Chapter 5 bankruptcy may be less complex than a standard Chapter 11 bankruptcy, it is still a complicated process that involves a variety of legal and financial requirements. To determine whether this option may be beneficial, business owners should work with a bankruptcy attorney who can help them understand the best ways they can address their debts and ensure that their business can continue operating successfully.
