In August 2019, Donald Trump signed a new law to the small business Reorganization Act (SBRA). The law was enacted in February 2020, whose aim was to provide a solution to the bankruptcy problems faced by the small business debtor reorganization cases under the United States bankruptcy codes in chapter 11. A new policy, subchapter 5 bankruptcy code, was added to chapter 11, providing small business debtors with more reliable and affordable bankruptcy proceedings. Additionally, subchapter 5 bankruptcy provides policies that reduce creditor exploitation and requires them to be extra keen with small business cases.
The new subchapter 5 bankruptcy code was made applicable to individual business debtors whose debts once liquidated are not more than $2,725,625, and half of their debts arise from business activities. Due to the covid-19 pandemic, many businesses are filing reorganization cases under the new subchapter 5 bankruptcy laws. Filing reorganization cases under chapter 11 for the small business was quite costly, time spending, and the owner was liable to the risk of losing ownership of the company. However, with the development of new subchapter 5, it distinguished the small business cases from other enterprises, increasing the probability of winning reorganization cases. It is cost-effective and fast.
How Do Small Businesses Benefit from Subchapter 5 Bankruptcy Law?
Subchapter 5 bankruptcy laws are customized for the reorganization of small businesses. It has saved many businesses in 2020 due to the coronavirus pandemic. Once your business is eligible to use subchapter 5, there are various benefits you will enjoy.
How do you know you are eligible for subchapter 5 bankruptcy laws? The original chapter 11 of the United States’ bankruptcy codes allow all businesses with commercial debt to file for bankruptcy reorganization case the trend is limited in the new subchapter 5. Only small businesses with debts ranging from $2,725,625 and below are eligible. Additionally, to be eligible, your debts should be liquefiable and arising only from business activities.
Offers Affordable Budgets
Small business reorganization under subchapter 5 has been made quite affordable to everybody. How? The new law eliminates extra administrative costs incurred in chapter 11 cases, which discourages many small businesses from filing their lawsuits. Some of the policies reducing case expenditures in subchapter 5 include;
- Subchapter 5 eliminates the US trustee’s fee, which is mandatory when filing cases under chapter 11. The fee is paid quarterly and amounts to 1% of all disbursements done, including rent and wages payments.
- In the new subchapter 5 bankruptcy code, there is no need to appoint official committees on the unsecured creditors. As a debtor, you won’t face the additional costs needed to pay for the creditor’s committee.
- Finally, to reduce further expenses, the debtors have been protected from filling disclosure statements in their reorganization plan. The disclosure statement in chapter 11 is lengthy, which consumes much of the lawyer’s time, and in return, the debtor gets to spend more money to pay the attorney.
It is Time Saving
Time is a precious commodity in businesses, especially when dealing with bankruptcy cases. The longer the case stays in court, the more money you will spend following its completion. The actualization of subchapter 5 bankruptcy laws aimed to reduce reorganization expenses to small businesses and the tedious processes. Filling a case under subchapter 5 bankruptcy, the court should organize a status hearing within 60days. This gives the debtor a chance to provide an overview of their business reorganization plans and negotiations. Additionally, the debtor is supposed to present a reorganization plan to the court within 90 days.
Subchapter 5 is Safer for Small Business Debtors
When you file a case with the original chapter 11 laws, there is a 50-50 probability risk of the debtor losing ownership of their business to the creditors. However, the new subchapter 5 bankruptcy policies protect the business debtor from losing their right to creditors. The debtors will have full control and ownership of their business as they continue to settle their debts. Only the debtor has permission to generate the reorganization pan and confirm its efficiency. This prohibits the cruelty of some creditors who can compose opposing plans jeopardizing the debtor’s business ownership. The absolute priority rule in subchapter 5 is omitted. Finally, every subchapter 5 case has an appointed trustee who guides the debtors in creating a comprehensive chapter 11 reorganization plan.
After developing the subchapter 5 bankruptcy law, many cases have been filed in the United States. With the benefits mentioned above, among others, subchapter 5 would be the best thing that ever happened to protect and develop small businesses in the United States.