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The CARES Act has amended the Bankruptcy Code to provide an expedited and easier version of a business bankruptcy proceeding. We now have “Subchapter 5” for small business and individual debtors. This process fulfills a sweet spot for small franchisors and franchisees. It anticipates a Chapter 11 type result, without the administrative headaches and expense, within 90 days of filing.

The purpose of this new section of the Bankruptcy Code is to allow business debtors and certain individuals with debts below $ 7.5 Million to reorganize their obligations under in a much less expensive and streamlined manner. Unlike the previous Chapter 11, the Subchapter 5 bankruptcy does not require voting on a plan of reorganization. Instead, like a Chapter 13 wage earner’s plan, the debtor’s disposable income is used to repay creditors. This eliminates the need for obtaining the consent of a class of “impaired” creditors as required under basic Chapter 11. It also relaxes some of the rules for administration of the Chapter 11 plan and the payment of United States Trustee quarterly fees. Certain individual debtors may also benefit from the elimination of the so-called “absolute priority rule” which prevented exemption of real or personal property in some cases.

The new “disposable income” requirement may mandate a minimum payment to creditors higher than what is now man under Chapter 11. Some of the normal Chapter 11 requirements, such as monthly operating reports, special Debtor in Possession bank accounts and supervision by special Trustees provide protection to creditors and parties in interest.

We anticipate a uptick in filings after the CARES Act funding and its forgiveness period expires. Because it provides a needed remedy for small business debtors and individuals concerned with the administrative burdens and expense of a Chapter 11 filing, we should be prepared to use Subchapter 5 to our advantage.

Franchisors should plan now to have a preset protocol for dealing with their franchisees who file Subchapter 5 because of the compressed deadlines. Franchisors can also suggest or aid struggling franchisees with Subchapter 5 to maintain their franchise during these uncharted times.

For franchisees and emerging franchisors, Subchapter 5 is a prescription to save their business from the economic consequences of the pandemic. There are also mortgage modifications provisions that will help guarantors of business debt to same their homes.

As these cases are filed, we will be compiling information and helpful advice in navigating the new bankruptcy world.

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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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