CARES Act Increases Eligibility Threshold For Small Businesses To File Under New Subchapter 5 Of The Bankruptcy Code

Tarter Krinsky & Drogin LLP

On August 23, 2019, the Small Business Reorganization Act of 2019 was signed into law, creating a new Subchapter 5 of the United States Bankruptcy Code. The new law, which went into effect on February 19, 2020, is designed to streamline and expedite the debt restructuring process for small businesses which affirmatively elect to file bankruptcy under Subchapter 5.

While Subchapter 5, as initially enacted, set a requirement that a small business have debts of no greater than $2,725,625 (both secured and unsecured) in order to be eligible to file under Subchapter 5, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed into law on March 27, 2020, has substantially increased that debt threshold to $7.5 million. The CARES Act provides that that increase will remain in effect for one year.

Coupled with that amendment, key provisions of the Subchapter 5 law include the following:

  • Filing of Plan; No Disclosure Statement Required: Unless the Court orders otherwise, the Subchapter 5 debtor must file a plan of reorganization within 90 days of the filing of its petition. However, unlike in Chapter 11 cases, no disclosure statement is required.
  • Creditors Don’t Vote on Plan: Creditors can object to the debtor’s proposed plan of reorganization, but unlike in a Chapter 11 case, there is not a formal vote to approve or reject the plan and thus the debtor is not required to go through the Chapter 11 process of soliciting creditor acceptances of the plan.
  • Confirmation of Plan: The requirement under the new law that the proposed plan be fair and equitable to unsecured creditors can be satisfied if the debtor commits thereunder that the business’ “disposable income” will be applied to pay creditors over a three to five year period. “Disposable income” is defined as income not needed for the payment of expenses necessary to the continuation, preservation and operation of the debtor’s business.
  • No Creditors Committee: Subchapter 5 does not provide for an official committee of unsecured creditors in the small business’ case.
  • Subchapter 5 Trustee: The new law does provide for a Subchapter 5 trustee in the case, but, unlike trustees in Chapter 7 and Chapter 11 cases, the trustee does not take possession of the debtor’s assets or control of the debtor’s business.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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