Your business may have been negatively affected due to COVID-19, and now you are considering bankruptcy. Chapter 11 bankruptcy is often very expensive, so you are considering the new subchapter 5. Bankruptcy Statistics COVID shows that consumer bankruptcies are down, but business bankruptcies are expected to rise. Although there may be a stigma about business bankruptcies you have to overcome, it may be something to explore.
No two bankruptcy cases are the same. There is always an iota of uniqueness in every bankruptcy case. As such, you may need to take some additional steps and meet up some requirements while filing for bankruptcy.
Step One: Does Your Company Qualify for Subchapter V of Chapter 11?
Individuals, corporations, and partnerships can qualify to file under Subchapter V of Chapter 11 Bankruptcy. However, this is not possible for single-asset real estate businesses. There is no debt limit for the Subchapter V of the Chapter 11 bankruptcy plan. But, a business must have nothing less than $2,272,525 in non-contingent, liquidated debt (unsecured and secured) if you want to qualify for this subchapter.
Under the CARES Act, the government increases the debt limit to $7,500,000. And unless the congress extends that figure, the debt limit is expected to expire in March 2021. You can take a Chapter 11 bankruptcy calculator to estimate the subchapter 5 qualification.
Step Two: Choose to Hire a Chapter 11 Attorney or not
The subchapter V of the Chapter 11 bankruptcy was designed to be a streamlined Chapter 11 bankruptcy case or a fast pass. Having said that, the process can still be a complicated one.
Chapter 11 bankruptcy is naturally a complex case. This is because they involve altering or restructuring lease agreements, contracts, and debts to ensure that a business can continue operating. Complex cram downs of liens have to be done, and this cram down sometimes exceeds the value of the collateral. Creditors are grouped into categories, and they will be treated based on the category they’re in
If you don’t know about the Chapter 11 bankruptcy process, you should speak with a bankruptcy attorney before filing for bankruptcy.
Step Three: Prepare and File Bankruptcy Forms and Petition
It is necessary that you prepare and file a bankruptcy schedule, statement, and petition. All chapters of bankruptcy have the same bankruptcy petition. You must select Chapter 11 when you’re completing the petition. It is also essential that you choose the option to shows that you’ll like to continue under Subchapter V of Chapter 11. You will be charged $1,717 as the filing fee for this type of bankruptcy.
The remaining bankruptcy forms are scheduled statements that show the debts, income, assets, and financial transactions of the company. You must ensure that the form is complete and accurate before submitting it. As you’re signing the form, you’re ascertaining that the information you’re giving is correct under penalty of perjury. After you’ve filed for bankruptcy, the clerk of court should assign a case number to your case. The bankruptcy court will mail a notice of bankruptcy to your creditors.
Note: Debtors filing for Chapter 11 debtors are expected to file additional reports and forms that other filings under other bankruptcy chapters are not mandated to file. Debtors must file operating reports, entity ownership reports, a well-detailed list of the 20 largest unsecured creditors, and other periodic financial reports. Ongoing reports must be filed during the Subchapter V case.
Step Four: Assignment of Bankruptcy Trustee
A bankruptcy trustee is appointed in all Subchapter V cases, which is unlike what occurs in normal Chapter 11 cases. The United States Trustee Office is responsible for appointing the Subchapter V trustees. The trustee is tasked with the responsibility to facilitate a consensual Chapter 11 plan that is acceptable to the creditor and the debtor. Under this act, here are some other duties of the trustee.
- The trustee can oppose the discharge of the debt if there are grounds for it
- Examine proof of claims and object any invalid claim
- Attend 341 Meeting, Status Conference, and other hearings regarding the case.
- The trustee can take control of the debtor’s assets and operate the company if the debtor doesn’t have the right to that.
- Prepare and file different reports, including accounting and final report.
As described above, the trustee has the primary duty to act as a mediator and assist the debtor to come up with a convenient plan. The Subchapter V trustee is usually someone with business experience and can be an asset to the debtor.
Step Five: Attend 341 First Meeting of Creditors, Initial Debtor Interview, & Status Conference
The process of getting a Subchapter V bankruptcy discharge is quite streamlined because the process is rapid. The UST’s office will assign a trustee to the case within 10 days of filing for the discharge. The trustee makes use of the Initial Debtor Interview to gain preliminary information about the debtor. The UST also tries to ensure that the debtor has an understanding of his responsibilities under the bankruptcy chapter he/she is filing for. Some of those responsibilities include setting up a bank account, using cash or collateral, and filing reports.
The debtor is expected to attend the 341 meetings of creditors which will be held within 30 to 45 days of filing for the bankruptcy discharge. The meeting is a public hearing, and the debtor is required to answer questions about financial affairs and the business under oath. Although it rarely happens, the creditor may appear for the meeting. The length of the meeting depends on the complexity of the case.
A status conference will be scheduled within 60 days of filing the case. It is very important to file a status report at least 14 days before the Status Conference. You should detail the steps you’ll take to ensure that you fulfill the terms of your agreement with the creditors. In the absence of a plan, the report should contain future efforts to come up with a consensual plan with your creditors.
Step Six: Chapter 11 Plan
Here, only the debtor in a Subchapter V case is allowed to file a plan of reorganization, unlike what is expected in a general chapter 11 case. The debtor is expected to submit the proposed plan within 90 days of submitting the proposal plan. Because the process is streamlined, you won’t be required to file a disclosure statement. However, the plan must contain the projections of the debtor’s ability to meet up with his/her obligation, a liquidation analysis, and a history of the business operations. If there is a consensual plan, the debtor is required to pay the creditor directly and may be discharged, and the services of the trustee are terminated.
If the debtor’s proposed plan does not meet the requirement for getting a consensual plan, the court can change the plan to a non-consensual one. The court will check to ensure that the plan is equitable, does not discriminate unfairly, and fair to interests and claims.
However, when the plan is non-consensual, the Subchapter V process is altered in numerous ways. For example, the debtor has to make all payments before he/she is issued a non-consensual plan. The responsibility of disbursing payments is on the bankruptcy trustee and not on the debtor. The trustee won’t be discharged until the bankruptcy case is closed. Filing for bankruptcy can be a difficult business decision, but hopefully, you now understand the process for subchapter 5 and how it differs from a consumer bankruptcy and Chapter 11.