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How does a business qualify for a Subchapter V bankruptcy?

| Dec 21, 2020 | Chapter 11 |

The Small Business Reorganization Act created Subchapter V, which allows smaller companies to file for bankruptcy without liquidating their assets. Your business may file a petition if you reasonably anticipate remaining open while reorganizing your liabilities.

Similar to a Chapter 11, you may need to prepare an outline that details how you intend to restructure your commercial debts through a court-approved plan. The court assigns a trustee to oversee your case and you may continue operations during the process, as noted by the American Bar Association.

How much debt may a business restructure?

Under the provisions of the SBRA, a business may file for Subchapter V with no more than $2.7 million in outstanding liabilities, as noted by CFO magazine. This amount reflects both secured and unsecured debts.

Secured debts generally include a mortgage, equipment and vehicles that may remain in the business’s possession during bankruptcy. Unsecured debts, however, may require a new payment arrangement approved by both the court and your business’s creditors.

What is the difference between the chapters?

Prior to the SBRA’s creation of Subchapter V, certain small businesses struggling with overwhelming debt loads did not have the resources to afford restructuring debts through a Chapter 11. The process generally requires the formation of a creditors’ committee, and the business filing the Chapter 11 petition must cover its costs.

If your business faces issues making it impossible to meet its liabilities, you may have the option of filing a Chapter 7 petition. This would require your company to liquidate its assets and use the proceeds to pay its creditors. By viewing Subchapter V as a hybrid of Chapters 7 and 11, you may have an additional option to help protect your business’s long-term viability.

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