By: Robert L. Pryor
Most businesses struggling with accumulated debt have resisted filing for Chapter 11 Reorganization based upon general concerns that it is both too expensive and too difficult a process. While some of these concerns are over blown, the simple truth is that, for a small business the cost and difficulty of a full-fledged Chapter 11 Reorganization might be more than a troubled business can handle.
Thus, when Subchapter 5 was promulgated effective February 19, 2020, at the very outset of the covid-19 pandemic it is understandable that it received far less fanfare then it deserved as everyone hunkered down to protect their health and isolate themselves for what amounted to the next two years.
Now more than ever, while small businesses continue to rebuild themselves and address debt accumulated during the pandemic, it is time to focus on the substantial benefits available under Subchapter 5 and how it may be the answer to a small businessman’s prayers.
Subchapter 5 enables a small business to freeze its existing (unsecured) debt and to quickly propose a Plan which will repay its creditors a fraction of what it owes, based upon its ability to repay debt. Stated differently, if the business generates only enough profits to repay a
small portion of what it owes, it is quite possible that this minimal profit can be paid over a period of 3 to 5 years as repayment in full of existing debt.
Subchapter 5 cases move quite quickly. This, the retainer paid to its counsel will be quite a bit smaller than in a conventional Chapter 11 case, and because the case moves quickly, total legal fees will also be substantially less.
In a traditional Chapter 11 case, creditors can veto a Debtor’s proposal for repayment. Not only does this give creditors leverage in the negotiation of a repayment plan but it often means that without creditor consent, the Debtor cannot emerge from Chapter 11. Additionally, the owners of the small business cannot retain ownership unless they meet stringent requirements or obtain creditor consent. Subchapter 5 solves all of this; creditors do not need to consent to a proposed Plan and a small business owner may maintain his equity in his business without creditor consent.
There are certain eligibility requirements in Chapter 5 which can be addressed on a case by case basis. However, the bottom line is that it is available to most small businesses. A business faced with substantial debt it is unable to quickly retire, owes it to itself to seek further detail. It could literally mean the difference between a business’ life and death.
Robert L. Pryor is a partner in the Westbury N.Y. firm of Pryor and Mandel up LLP and has practiced bankruptcy law for over 30 years. He is a Chapter 7 Trustee and Former Law Clerk to Hon. C. Albert Parente, Chief Bankruptcy Judge of the Eastern District of New York.
