On February 19, 2020, the Small Business Reorganization Act (SBRA) went into effect. The SBRA created a new type of chapter 11 debtor that gets special/different treatment under the bankruptcy law – a “subchapter 5” debtor. Subchapter 5 was enacted for purposes of creating a new streamlined and less costly chapter 11 option for those engaged in small business activities, both individuals and businesses alike.
Subchapter 5 enables debtors, both individuals and businesses alike, to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.
For a chapter 11 debtor to be a subchapter 5 debtor, the debtor must: (1) elect to be a subchapter 5 debtor; (2) be engaged in commercial or business activities (excluding a single asset real estate business); and (3) have liquidated debts of not more than $7,500,000, of which at least 50% arose from the debtor’s business activities.
While the case is pending, the debtor remains in exclusive possession and control of all property of the estate, and is empowered to use, sell or lease such property, even outside the ordinary course of business upon Court approval. A trustee is automatically appointed to all subchapter 12 cases. The trustee is charged with, among other things, investigating the debtor’s financial affairs, facilitating plan confirmation and, in certain circumstances, act as disbursing agent for certain of the debtor’s plan payments. There is no automatic appointment of an unsecured creditor committee in subchapter 5, no quarterly fees due to the United States Trustee, and no absolute priority rule. Also, within 60 days of the filing, a status conference will be held to help facilitate an expeditious and economical resolution of the case. And, at least 14 days in advance of the status conference, the debtor must file a status report detailing its efforts to attain a consensual plan of reorganization.
A subchapter 5 debtor has perpetual exclusivity to file a plan, and must do so within 90 days of the petition date. Creditors vote on confirmation of the plan. But, a plan can still be confirmed even when all classes of creditors vote against it. Generally, to achieve court approval (confirmation), the plan must:
- Be proposed in good faith
- Be feasible
- Not unfairly discriminate against any impaired non-consenting class
- Provide that all priority unsecured claims are paid in full over a 3-5 year plan term (e.g. recent taxes, domestic support obligations, administrative claims, etc.)
- Satisfy the “Best Interest Test” by providing that general unsecured claims are to be paid at least what they would receive in a hypothetical chapter 7 liquidation
- Satisfy the “Best Efforts Test” by providing that general unsecured claims are to be paid at least all of the debtor’s projected disposable income over a 3-5 year plan term
If the plan is consensual, the debtor will receive a discharge immediately upon confirmation. If the plan is non-consensual, then a discharge is entered after completion of all payments required in the commitment period.