Running a business is expensive. Between property purchases, equipment rentals, payroll, unexpected market downturns, and countless other costs, bills can stack up quicker than you can tackle them.
Overwhelming business debt is common, and it is not something a business owner needs to be ashamed of. Fortunately, federal bankruptcy law provides options for businesses tackling debt.
For many businesses, bankruptcy is not an ending. It is a structured new beginning for reorganization and recovery. Depending on the bankruptcy procedure you choose, Subchapter V vs. Chapter 11, you can tailor the reorganization to your unique situation.
Brandon J. Tittle of Tittle Law Firm, PLLC, has over a decade of experience handling complex business restructuring matters. He has an extensive understanding of business finances and wants to support Texas businesspeople.
If bankruptcy looks like it is on the horizon, don’t panic, and don’t judge yourself. Tittle Law Firm is here to safeguard your interests.
You can reach our lawyers at 972-213-2316
Chapter 11 Reorganization vs. Subchapter V Reorganization
In the United States Bankruptcy Code, Subchapter V is actually a subchapter of Chapter 11. However, the difference between a Chapter 11 and a Subchapter V reorganization, the requirements, and the effect on a business can be worlds apart.
Standard Chapter 11 Procedure
In a traditional Chapter 11 bankruptcy, the business in debt (the debtor) can petition the court for reorganization, or certain creditors may petition for it. After filing the petition, the debtor gives the court a disclosure statement that includes the following:
- Schedule of their current income and expenditures,
- Statement of their financial affairs,
- Schedule of their executory contracts and unexpired leases, and
- Schedule of their assets and liabilities.
While other parties may develop and file repayment plans for the debtor in a Chapter 11 case, the debtor has a 120-day exclusivity period during which only they may file a reorganization plan outlining how they intend to repay their debts.
Creditors who will be negatively affected by the plan typically must vote to approve it. In many Chapter 11 cases, a creditors’ committee composed of the debtor’s seven largest unsecured creditors helps formulate the repayment plan and investigates the debtor’s behavior.
While awaiting court confirmation of the repayment plan, the debtor serves as a debtor-in-possession, which means they can act as a trustee by managing their assets and debts until the plan is approved. The court may also appoint a trustee, but this is generally rare in a Chapter 11 case.
Subchapter V Procedure
Subchapter V was designed to be a streamlined procedure for eligible small businesses under Chapter 11. When it comes to Subchapter V vs. Chapter 11, Subchapter V changes the process in several ways, including:
- Debt limit threshold. Reorganization is open to debtors with no more than $3,424,000 in combined secured and unsecured debts.
- Trustee appointment. One is appointed in every case to administer the debtor’s estate and oversee reorganization.
- Minimal unsecured creditor involvement. Unsecured creditors are typically not part of the creditors’ committee unless the court orders one for cause.
- Reliance on plan. Debtors may not need to file a disclosure statement if their reorganization plan provides enough information.
- Debtor filing. Only debtors need to file reorganization plans.
- Reduced fees and costs. There is no requirement for debtors to pay U.S. Trustee fees.
These differences often translate into a faster path for many small business reorganizations. When it comes to the cost comparison of Chapter 11 vs. Subchapter V reorganization, these differences can make Subchapter V a more affordable option.
Paying Back and Discharging Debts
Debtors in Chapter 11 and Subchapter V cases repay their debts under court-confirmed repayment plans. When a debtor completes their payments, the court discharges their remaining debts. This process can significantly reduce liability, allowing businesses to move forward with fewer burdens.
Consensual vs. Nonconsensual Plans
If creditors who would be impaired approve the repayment plan before court confirmation, the plan is a consensual plan. But if the court confirms the plan over a creditor’s objection, it is a nonconsensual plan that must comply with cramdown requirements before confirmation.
Complying with cramdown requirements means the plan is fair and equitable and doesn’t unfairly discriminate among impaired and objecting classes of claims. Typically, a nonconsensual plan following cramdown rules is fair and equitable if:
- The debtor has to use all their projected disposable income to make payments for three to five years,
- The debtor is reasonably likely to make all their plan payments, and
- There are remedies to address a debtor’s default on a plan payment.
Keep in mind that fewer cramdown rules are applicable in Subchapter V cases. Contact our firm to discuss the benefits and drawbacks of Subchapter V vs. Chapter 11 reorganization and which option might be best for you.
Did You Accept Merchant Cash Advances (MCAs)?
Many small businesses rely on MCAs because the funding seems easier, but the structure can be harsh and might include:
- Daily withdrawals from receivables,
- Aggressive collection pressure, and
- Contract terms that can feel impossible to fulfill if sales dip.
A reorganization may alleviate the pressure of this type of arrangement, and a Subchapter V reorganization might bring relief even faster.
Whatever debts you have or business arrangements you have made, we can help lighten your burden. Bankruptcy cases can be complex, but they are a great business option for many when they have the help of a good attorney.
We Can Help You Choose the Path That Fits Your Business
A bankruptcy case can be a smart way to keep your business doors open for you, your patrons, and your employees. If you want skilled help with evaluating your options, talk to our team at Tittle Law Firm.
Brandon Tittle is a highly experienced bankruptcy attorney who has also worked for multiple U.S. Bankruptcy Judges and holds a B.B.A. in accounting. With extensive knowledge and passion for supporting hardworking businesspeople in Texas, our team can help you find the right relief. Call us or contact us online to schedule an appointment.
Legal References Used to Inform This Page
To ensure the accuracy and clarity of this page, we referenced official legal and other resources during the content development process:
- United States Courts, Chapter 11 – Bankruptcy Basics.
- United States Department of Justice: U.S. Trustee Program. Subchapter V.
- Paul W. Bonapfel, U.S. Bankruptcy Judge, N.D. Georgia, Top 15 Features of Subchapter V (Apr. 2023).
