Converting Between Subchapter V and Traditional Chapter 11 Bankruptcy

When a business files for bankruptcy, there are certain circumstances that may arise that can change the business’s financial situation such that the business may want to convert from one type of bankruptcy to another. Most often, businesses that file for reorganization bankruptcy under Chapter 11 want to convert (or need to convert) to a liquidation bankruptcy under Chapter 7. The US Bankruptcy Code expressly allows business debtors in certain circumstances to convert a traditional Chapter 11 case to a liquidation bankruptcy under Chapter 7, or to convert a Subchapter V case to a Chapter 7 bankruptcy case. But what if your business wants to convert from a traditional Chapter 11 case to a Subchapter V case, or vice versa, from Subchapter V to a traditional Chapter 11 bankruptcy case?

Given that Subchapter V filings are still relatively new, there is not a significant amount of case law around this issue. However, there is some guidance from bankruptcy courts, and our West Palm Beach bankruptcy lawyers can tell you more about your business’s possible options.

Bankruptcy Code Does Not Address Converting to Subchapter V and Chapter 11 

As we noted above, Section 1112 of the Bankruptcy Code addresses how and when a traditional Chapter 11 case, or a Subchapter V bankruptcy, can be converted from a reorganization bankruptcy to a liquidation bankruptcy under Chapter 7. However, the Bankruptcy Code does not specifically address converting to a traditional Chapter 11 bankruptcy or Subchapter V from one another.

Accordingly, it is important to consider bankruptcy court decisions on these matters to determine whether a conversion might be possible if this is something your business needs to consider.

Converting to a Subchapter V Bankruptcy from Chapter 11 

When the Small Business Reorganization Act of 2019 took effect and created Subchapter V bankruptcy, bankruptcy courts generally permitted business debtors in Chapter 11 bankruptcy to convert to Subchapter V bankruptcy if they qualified based on the Subchapter V requirements. Accordingly, if your business initially filed for Chapter 11 bankruptcy but became eligible for Subchapter V, or realized a Subchapter V filing would have been possible, it may be possible to convert.

To determine whether a Subchapter V filing would be beneficial to your business — over a traditional Chapter 11 case — is something you should certainly discuss with a South Florida business bankruptcy lawyer before moving forward with such a decision.

Converting to Traditional Chapter 11 from Subchapter V 

What if there are reasons that your business wants to convert from an initial Subchapter V filing to a traditional Chapter 11 bankruptcy? Often, this issue arises when a business that has filed for Subchapter V is otherwise facing a conversion to Chapter 7 or a dismissal of the bankruptcy case, often due to the difficulty of having a plan confirmed.

Recent case law, including a bankruptcy case out of Washington, D.C., decided that the fact that a debtor could convert from traditional Chapter 11 to Subchapter V means that the inverse should also apply — that a debtor should be able to convert from Subchapter V to Chapter 11. If this is something your business is considering, you should discuss the possibility with a lawyer today.

Contact a West Palm Beach Bankruptcy Lawyer Today 

If your business is considering a reorganization bankruptcy filing and needs assistance, or if your business needs help converting to a reorganization bankruptcy in South Florida, one of the experienced West Palm Beach bankruptcy attorneys at Kelley, Kaplan & Eller can speak with you today. We have years of experience representing businesses in reorganization bankruptcy cases, and we can provide you with more information about Subchapter V, traditional Chapter 11, and other types of reorganization bankruptcies that may be relevant to your business. Contact us today for more information and to begin working on your bankruptcy filing with one of our South Florida bankruptcy lawyers.

Sources:

law.cornell.edu/uscode/text/11

abi.org/member-resources/blog/subchapter-v-conversion-for-existing-chapter-11-debtors