Bankruptcy Rules Get More Strict for Some Small Businesses

Some small business bankruptcy cases could get more complicated due to the recent expiration of a program that streamlined the process for certain businesses.

The program, known as Subchapter V, was often used as an alternative to traditional Chapter 11 filings. Congress created this option as part of the Small Business Reorganization Act in 2019, giving eligible businesses a way to shed debts without losing company ownership or going through all of the procedural oversight mechanisms that often make Chapter 11 cases costly and time-consuming. Specifically, businesses wouldn’t have to pay for court-appointed creditors’ committees or quarterly fees to a bankruptcy watchdog. They also wouldn’t have to solicit creditors for votes on a restructuring plan.

Originally, this option was only available to businesses with up to $2.7 million in debt. But a COVID-era rule change allowed businesses with up to $7.5 million in debt to access this option.

Congress recently renewed part of the law, but did not extend the provision that allowed businesses with up to $7.5 million in debt. So currently, only those with up to $2.7 million in debt can utilize Subchapter V. Those with additional debts can still file for bankruptcy, but will have to go through the traditional Chapter 11 process.

Joe Luzinski, a restructuring advisor at Development Specialists Inc., said in a recent conversation with Reuters, “Chapter 11 is a great tool for reorganizing a business, but it can become very costly in situations when disputes and litigation are allowed to bog down a case. It takes a lot of money to go broke.”

Bankruptcy rules and procedures are in place to make sure both the filer and their creditors receive a fair deal. But some of the processes and costs can be especially burdensome for small businesses. That’s why it’s so important for businesses to understand the specific rules and procedures that apply to them.

If this rule expiration impacts your business, it may change the cost and time commitment required to restructure debts, which could ultimately impact your decision-making process.

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