Get the basics of subchapter 5 bankruptcy
Opening your small business was the fulfillment of a dream. However, the last few years have not been easy for small businesses in New Mexico and across the country. For many, business fell low and debt piled high.
When the Small Business Reorganization Act went into effect in 2020, it established subchapter 5 as a debt relief option for small business owners. Here are some of the basic elements of this form of bankruptcy that you should know.
How does it work?
The goal of subchapter 5 is to make it easier for small businesses to seek reorganization bankruptcies. According to the United States Courts, it does this by cutting costs and facilitating the bankruptcy process.
There are two fundamental aspects of this type of bankruptcy:
- The repayment plan: Instead of liquidation, small business owners can negotiate new terms of their loans with creditors, and create a plan to repay them over three to five years. Other chapters require creditors to approve this repayment plan, but this is not the case in subchapter 5. Only the court has to approve the repayment plan, which they will do if it is fair and does not favor one creditor over another.
- Reorganization: The goal of this type of bankruptcy is to keep your business’s doors open. However, it is also necessary to address financial and operational issues to make the business more cost-effective. That is where reorganization comes in. This might mean adjusting your business operations to spend less money, or adjusting the leadership and organization of your business.
Throughout the process, you will work with the appointed trustee who will help create a fair repayment plan and assist with reorganization as well.
Who can file?
As mentioned above, subchapter 5 is designed to help small business owners. However, business owners must prove their eligibility to file. The factors for eligibility include:
- You are engaged in active business activities
- You have $2.75 million in debt or less
- 50% of your debt must arise from your business activities
It is critical to note that the Coronavirus Aid, Relief, and Economic Security Act (CARES) increased the debt limit to $7.5 million. The Bankruptcy Threshold Adjustment and Technical Corrections Act extended this increased limit until June 2024.
The process of a subchapter 5 filing differs from Chapter 11 bankruptcy. Therefore, it will be beneficial to seek guidance from an experienced bankruptcy lawyer to learn more about this option.