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What does subchapter 5 of chapter 11 mean for California businesses?

On Behalf of | Nov 20, 2023 | Chapter 11 Bankruptcy

California business owners can file Chapter 7 or Chapter 11 bankruptcy. Chapter 7 is for businesses that are unable to recover from their financial problems and need to close up shop. Chapter 11 is for operations that can remain in business if their creditors allow them to negotiate payment plans.

Chapter 11 bankruptcy

Chapter 11 is the form of business bankruptcy that business owners choose if the business can survive. This form of bankruptcy makes it possible to reorganize and restructure business debt without closing.

Because of the complexity and cost, some small business owners are unable to afford filing Chapter 11. In an effort to remedy this situation, the U.S. bankruptcy code added subchapter 5 to Chapter 11. The subchapter became active in 2020 to help small business owners who want to file Chapter 11.

How does subchapter 5 benefit small business owners?

Subchapter 5 provides an easier way for small businesses to repay their debt. Creditors must accept a repayment plan that spans three to five years. However, the bankruptcy court must approve the repayment plan and determine it’s fair to creditors.

Can any small business claim subchapter 5 bankruptcy?

A business can file subchapter 5 if it’s still operating and has less than $2.75 million in debt. Subchapter 5 excludes some types of business debt. For example, debt owed to a business insider isn’t covered by subchapter 5. An officer or a director are examples of business insiders.

Business activities must account for at least 50% of the debt. Also, a business that specializes in owning and operating one property is ineligible to file.

If a business is eligible to file subchapter 5, it will receive several benefits. Most importantly, the business remains open as long as its owners follow the repayment plan. So, if you need to file business bankruptcy and want to remain in business, this benefit will appeal to you.

Another benefit is that creditors don’t need to approve the repayment plan. That’s much different from chapter 11 bankruptcy, which requires that creditors must approve the plan. As long as the bankruptcy court thinks the repayment plan is fair, your creditors have to accept it.

Deciding to file business bankruptcy is a big step. The process is extensive, and it may seem overwhelming. However, it may be your best path to recovery.