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Allows Small Business Owners to Maintain Control

On February 19, new Bankruptcy law gave small business owners an option between an expensive Chapter 11 reorganization to maintain control of their businesses and a Chapter 7 liquidation requiring relinquishment of control.

The Small Business Reorganization Act wasn’t written with the pandemic in mind, but it might seem to have been with Colorado Gov. Jared Pollis in mid-March issuing Shelter-at-Home orders to protect the health of the state population, causing restaurants and other service businesses to cease operations with bills outstanding and rent payments not subsiding.

With the new law, small businesses with less than about $2.7 million in debt have an option to maintain control.  A month after it was enacted, only five small businesses had filed cases in U.S. Bankruptcy Court, District of Colorado, but the tsunami of bankruptcy cases that bankruptcy attorneys expect to be filed as a result of the economic difficulties amid the pandemic will most certainly include quite a few Small Business Bankruptcies.

There are several advantages of this new Subchapter V bankruptcy filing:

  • No Absolute Priority Rule, making it easier for businesses to stay in control.
  • No automatic appointment of a creditor’s committee.
  • Debtor maintains more control in his three- to five-year repayment plan.
  • Cramdowns are possible, like in a full-fledged Chapter 11.
  • Mortgages can be modified.

While there are many flavors of bankruptcy, from the simple liquidation of debt for an individual person debtor who lost his job and can’t pay his credit card debt filing a Chapter 7 to walk away from that credit card debt to the biggest business filing a Chapter 11 reorganization, the Subchapter V falls somewhere in the middle.  With Chapter 7 liquidation being the simplest, Chapter 13 reorganization being the next most complex along with it’s cousin the Chapter 12 with extra accommodations for farmers, this Subchapter V is more complex than a Chapter 13 or a Chapter 12 but not as complicated as a Chapter 11.

Keep in mind municipalities like Detroit have filed Chapter 9 reorganizations.  And U.S. based companies with overseas debt can file Chapter 15s, just as overseas companies with U.S. debt can also file Chapter 15s.  Another different flavored bankruptcy that follows much of The Bankruptcy Code’s core rules is an involuntary bankruptcy where a creditor forces a debtor into a bankruptcy filing; this is distinguished from all other bankruptcies which are voluntarily filed by the debtors.

For more information on debt relief, contact Adams Law for a consultation.  – Roger Adams