Small Business Vs. Subchapter V: Is There A Difference?
If you own a small business and have been considering the possibility of a reorganization bankruptcy, you may have conducted some initial research into your options for a Chapter 11 bankruptcy. In doing so, you may have come across terms for “small business bankruptcy,” as well as discussions around the relatively new “Subchapter V” bankruptcy. Accordingly, you may be wondering: is there a difference between small business bankruptcy and Subchapter V bankruptcy? In general, small businesses may be eligible to file for Chapter 7 or Chapter 11 bankruptcy, and they are often eligible to file for Subchapter V (which is a subset of Chapter 11). In situations where the small business is a sole proprietorship, debt reorganization might even be possible under Chapter 13.
However, it is important to know that, in the context of Chapter 11 bankruptcy, there are distinct rules for a small business case and for a subchapter V case. Many small businesses do qualify for Subchapter V, but there are some specific distinctions to address. Our West Palm Beach bankruptcy attorneys can explain in more detail.
Small Business Debtor Rules and Subchapter V Rules
It can be confusing to look into Subchapter V bankruptcy and to come across separate rules and information for a small business debtor and for a debtor who files for bankruptcy under Subchapter V. The short explanation is that there are two systems under Chapter 11 through which small business debtors can file for bankruptcy: under the small business debtor rules, and under Subchapter V.
What is the reason for the two systems that currently exist alongside one another, especially when they are so similar? In 2019, Congress passed the Small Business Reorganization Act, which created Subchapter V as a type of bankruptcy under Chapter 11. In this law, which became effective in February 2020, a debtor is defined as a small business debtor. In March 2020, the CARES Act added a definition of a debtor with a distinct definition based on the amount of debt limit ($7,500,000), and that part of the law has been extended. As a result, a small business can technically file a small business case without choosing to file under Subchapter V. At the same time, many businesses (and some individuals) can be eligible to file under Subchapter V.
The U.S. Courts explain the differences in the requirements:
“In order to file a small business case, the debtor must be engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with total secured and unsecured debts of $3,024,725 or less, not less than 50 percent of which arose from the commercial or business activities of the debtor. In order to file a subchapter V case, the debtor must be engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with combined total secured and unsecured debts of $7,500,000 or less, not less than 50 percent of which arose from the commercial or business activities of the debtor. For both types of small business cases the combined total of secured and unsecured debts must be owed as of the date of filing for bankruptcy relief.”
Contact a West Palm Beach Bankruptcy Attorney
Do you have questions about filing for bankruptcy as a small business? Whether you want to learn more about various options for small businesses to file for bankruptcy, or you want to learn about your eligibility and to file for Subchapter V, one of the experienced West Palm Beach bankruptcy attorneys at Kelley Kaplan & Eller is here to assist you. Do not hesitate to get in contact with us to discuss your circumstances and your options.