Insight

Subchapter V: A silver lining for small businesses mulling bankruptcy

Many small businesses continue to struggle in the wake of the coronavirus (COVID-19) pandemic. Some have already closed their doors and are liquidating assets. Others, however, may have a relatively less onerous option: bankruptcy.

Although bankruptcy obviously isn’t an optimal outcome for any small company, there may be a silver lining: A new bankruptcy law — coupled with an under-the-radar provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act — has made the process quicker and easier. It may even allow you to retain your business.

New law made better

The law in question is the Small Business Reorganization Act of 2019. That’s right, it was passed just last year and took effect on February 19, 2020, about a month before the pandemic hit the country full force.

The Small Business Reorganization Act added a new subchapter to the U.S. bankruptcy code: Subchapter V. Its purpose is to streamline the reorganization process for smaller companies and, in some cases, improve their odds of recovery.

When signed into law, Subchapter V applied only to companies or proprietors with less than about $2.7 million in debt. However, under the CARES Act, this amount has been temporarily increased to $7.5 million in debt. (Additional details apply; contact a bankruptcy attorney for a full explanation.)

Potential improvements

For small-business owners, Subchapter V could improve the bankruptcy process in several ways:

You may be able to keep your company. Under a Chapter 11 reorganization, business owners typically don’t receive an equity stake in the reorganized company until all debts are repaid. Subchapter V creates a pathway for owners to retain their equity if their disposable income is distributed to creditors over a certain period (generally three to five years) in a “fair and equitable” manner.

You may not need creditors’ approval to proceed. Small-business bankruptcies have long been stymied when one group of creditors object to the reorganization plan. Under Subchapter V, once a bankruptcy court approves the plan, the reorganization may proceed without creditors’ approval.

You may incur fewer costs and get it done more quickly. Subchapter V offers the opportunity to reduce the documentation and level of detail required under a traditional Chapter 11 proceeding. In turn, this can make the process less costly and more expeditious.

Prudent path

Given the extreme and sudden nature of this year’s economic downturn, bankruptcy has unfortunately become an option that many embattled small businesses will need to consider. Our firm can help you assess your company’s financial position and choose the most prudent path forward.

© 2020

Related Insights

Nonprofit start-ups: Form 1023 or 1023-EZ? | accountant in alexandria va | Weyrich, Cronin & Sorra

Non-Profits

Nonprofit start-ups: Form 1023 or 1023-EZ?

If you’re starting up a new 501(c)(3) not-for-profit organization, you likely face many decisions. One of them is which form to use when applying…
Do you have questions about taking IRA withdrawals? We’ve got answers | cpa in harford county md | weyrich, cronin and sorra

Tax Prep, Planning & Strategy

Do you have questions about taking IRA withdrawals? We’ve got answers

Once you reach age 73, tax law requires you to begin taking withdrawals — called Required Minimum Distributions (RMDs) — from your traditional…
How Section 1231 gains and losses affect business asset sales | business consulting services in elkton md | weyrich, cronin and sorra

Management Advisory Services & Business Consulting

How Section 1231 gains and losses affect business asset sales

When selling business assets, understanding the tax implications is crucial. One area to focus on is Section 1231 of the Internal Revenue Code,…

Connect with us

Use the form below to send us an email. WCS responds directly to all inquiries and general questions within 24 hours of posting.

This contact form is deactivated because you refused to accept Google reCaptcha service which is necessary to validate any messages sent by the form.