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The Subchapter 5 element of Chapter 11

On Behalf of | Jan 25, 2022 | Chapter 11 Bankruptcy

Bankruptcy protection isn’t just for individuals: Businesses may file for bankruptcy when they fall on hard times and cannot pay their obligations. A California business may turn its fortunes around in time and become profitable again. Chapter 11 provides a way for companies to continue to operate, and Subchapter 5 is a critical element of this type of bankruptcy.

Chapter 11 and Subchapter 5

Chapter 11 refers to “reorganizational bankruptcy,” which involves altering a business entity’s debt situation. A reorganization plan may work to benefit both the debtor and creditor while trying to keep the company afloat. Bankruptcy laws, such as those guiding Chapter 11 decisions, come from federal statutes. Federal law remains open to repeal and revision over time, and one change led to the rules in Subchapter 5.

The Small Business Reorganization Act established Subchapter 5 in February of 2020. Under this addition to Chapter 11, small businesses with less than $2.75 million in debt may seek bankruptcy protection. Previously, the threshold was higher, making things more challenging to small business owners.

Filing for Chapter 11

With Chapter 11 bankruptcy, businesses may set up a three- to five-year plan to pay obligations. Subchapter 5 adds additional rules that benefit small businesses. Besides lowering the debt threshold amount, this allows small companies that earn profits but struggle with debts to seek protection.

Besides the critical benefit of remaining operational, a business owner may also garner unsecured debt discharges. Creditor approval is not required for the payment plan on the remaining debt either. The proprietor could take advantage of Subchapter 5, which, in turn, allows the business owner to assert protection under Chapter 11. A struggling company may then find a way to thrive.