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Acting Now To Ensure a Fast-Paced Bankruptcy

Financially distressed small businesses are piling into bankruptcy court before a key provision of a debtor-friendly bankruptcy law potentially expires this summer.

Last month, more than 200 small businesses filed Chapter 11 in the U.S. under what’s known as Subchapter V—a faster, easier, and more affordable way to reorganize that took effect with the Small Business Reorganization Act of 2019. That was a 78% increase from the same month a year ago, the Wall Street Journal reports, outstripping the overall 48% rise in commercial bankruptcies for the same period. 

Why Filings Are Up
While struggling through higher interest rates and the end of pandemic funding support, some small businesses, by filing now, want to ensure they qualify for Subchapter V before its $7.5 million cap on secured and unsecured debt drops substantially. In response to the economic distress caused by Covid-19, Congress temporarily raised the cap from $2.7 million in 2020. It has extended the higher cap twice, most recently in 2022, but without further action the number will reset at the lower figure on June 21. (An American Bankruptcy Institute task force is requesting another extension.)

How Subchapter V Is Different
Subchapter V bankruptcies are significantly different from typical Chapter 11 bankruptcies in ways that can present challenges for lenders. Only debtors, for instance, can file a restructuring plan under Subchapter V. And unlike in Chapter 11, a debtor can obtain plan confirmation from the court without a single consenting class of creditor. (Get more details in this RMA Journal article, “A Banker’s Guide to the Bankruptcy Code’s New Subchapter V.”)

While that streamlines the process for companies, it limits creditors’ influence over the bankruptcy’s outcome. “Lenders need to take proactive steps and determine ways to forecast and protect themselves if and when [a Subchapter V filing] comes,” said Jason Alpert, managing partner at Castlebar Holdings, during RMA’s recent “Understanding and Mitigating the Risks of Subchapter V Bankruptcies” webcast.