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Subchapter 5 bankruptcy could give businesses a fresh start

| Aug 4, 2020 | Bankruptcy

The addition of Subchapter 5 to Chapter 11 Bankruptcy rules has potentially given small business owners the protection they need to keep their operations afloat in demanding economic times. Businesses in Pennsylvania are failing at an alarming rate under governmental emergency declaration status, and the new Subchapter 5 provision included in the Small Business Reorganization Act of 2019 that went into effect in February 2020 could be just what many will need going forward. For those who were considering Chapter 11 protection anyway, or even personal Chapter 7 bankruptcy, it may be the perfect time to make a final decision after consulting with an attorney on what the legislation allows.

One of the most important components of Subchapter 5 has been qualifying to file a petition. The original legislation specifically set the debt cap at $2,725,625 to qualify for Chapter 11, but the CARES Act of 2020 drastically increased that amount to $7.5 million. This increase will qualify many businesses that previously would be forced to file a standard Chapter 11 reorganization petition with creditors still having significant input.

The CARES Act of 2020 gives the filing party even more power because the trustee who is appointed to the case does not take complete control of the business as in a prior Chapter 11 approval. The business operator can keep the business going while the debt restructuring negotiations are worked out. This stipulation also gives the creditors incentive to bargain in good faith and potentially accept a longer payoff term than in a prior Chapter 11 petition.

The new legislation enhancement also gives experienced bankruptcy attorneys more leverage when crafting a Chapter 11 business bankruptcy petition that maximizes discharged debt and produces a longer and more favorable repayment plan. The emergency declaration modifies the legislation by allowing for an extended repayment period. However, filings must be approved within the next year as the modification is set to expire when the emergency declaration time period ends.

When filing Chapter 11 Subchapter 5 under the CARES Act of 2020, the help of a professional may be critical to a business’ success. Business owners should may want to consult a Pennsylvania bankruptcy attorney who knows how the modifications apply.