CARES Act expands small business access to less expensive, quicker bankruptcy option
Here’s what you need to know about Chapter 11’s new subchapter V
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As the coronavirus pandemic weighs on businesses around the U.S., a new bankruptcy option that was expanded under the CARES Act may be able to help some small businesses navigate the crisis.
Companies around the country have felt pressure from lockdown measures and forced store closures, which has led to an uptick in overall bankruptcy filings, Joe Pack, attorney at Pack Law, told FOX Business.
“Sort of like the pandemic, there’s really no discrimination,” Pack said. “Whether the companies are sexy or not, are large or not … it’s affecting all of them.”
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The good news for small businesses is that there is a less expensive, quicker process they can choose as opposed to filing for traditional Chapter 11 protection.
The Small Business Reorganization Act, which took effect in February, added a feature to the bankruptcy code known as subchapter V. The provision applied to small businesses with debt amounts up to $2.725 million.
The CARES Act upped the debt threshold to $7.5 million, making the option more widely available to small businesses.
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WHAT IS SUBCHAPTER V?
It is a streamlined, less expensive and more accessible bankruptcy process that allows small businesses to restructure without ceding control of operations.
Under subchapter V, only a debtor can file a plan, which must be done within 90 days of filing for bankruptcy. There is no committee of unsecured creditors who need to approve the plan. Instead, the plan is expected to be approved so long as the debtor allocates discretionary income toward plan payments over the course of three to five years. The owner also does not have to pay creditors in full in order to retain control.
“A lot of people that explore Chapter 11 appreciate how expensive it is,” Pack said, who noted that subchapter V allows small businesses to “get in and out quickly.”
The broadened threshold is set to expire next year.
In terms of popularity, businesses are still adjusting to the idea of subchapter V, Pack said.
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He added that it doesn’t hurt for a company to explore the option of filing for bankruptcy protection, as a way to learn what options are available. It doesn’t have to mean that you are going out of business or that you are going to file.
Recently, a number of major retailers have filed for bankruptcy, including J.C. Penney, Neiman Marcus and J. Crew.