Subchapter V bankruptcy offers many perks specifically designed for small businesses, but it can also offer some challenges.
Tight Deadlines: One of the biggest challenges in Subchapter V bankruptcy is the fast-paced timeline for submitting and getting a reorganization plan approved. Debtors have just 90 days from filing to get their plan in, which is a much shorter window compared to a traditional Chapter 11 case.
What Makes This Tough:
Time Crunch: Getting a solid reorganization plan together in just 90 days is no small feat. It takes a lot of planning and coordination. Debtors need to quickly figure out their financial situation, come up with a workable restructuring strategy, and then draft a plan. This can be especially tough for small businesses that might not have the resources or experience to handle it smoothly.
Limited Negotiation Time: With such a tight deadline, there’s not much time to negotiate with creditors and other stakeholders. Even though the process is meant to make negotiations smoother, it can still be hard to get everyone on the same page, especially if there are big disagreements.
Missing the Deadline: If the 90-day deadline isn’t met, the case might get bumped to a traditional Chapter 11, which is more complicated and expensive. In some cases, it might even get dismissed, which means the debtor could lose the protections that bankruptcy provides.
Making the Reorganization Plan Work: For a reorganization plan to get the green light under Subchapter V, it has to be financially viable. That means the debtor needs to show they can bring in enough revenue to meet the plan’s commitments, typically by using their projected disposable income to pay creditors over three to five years.
What Makes This Tough:
Getting Projections Right: Debtors have to create accurate financial projections to prove they can meet the plan’s goals. If they’re too optimistic, they could run into cash flow problems later. If they’re too cautious, creditors might not be satisfied. Making accurate predictions about revenue, expenses, and cash flow can be tricky, especially in uncertain economic times.
Plan Feasibility: The court needs to believe the plan has a reasonable chance of success. If the court, creditors, or trustee thinks the debtor’s business model or financial projections don’t add up, they might not approve the plan, which could lead to the case being converted or dismissed.
Resource Strain: Small businesses often don’t have a lot of extra resources, and trying to meet the demands of a reorganization plan while keeping the business running can be overwhelming. This is especially tough for businesses that have already taken a hit in revenue or seen their costs go up.
Handling Relationships with Creditors and Stakeholders: Even though Subchapter V does away with the need for a creditors’ committee and gives the debtor the exclusive right to propose a plan, managing relationships with creditors and other stakeholders is still a critical and challenging part of the process.
What Makes This Tough:
Negotiating with Creditors: The debtor may be the only one who can propose a plan, but they still have to get creditors on board. Creditors might have conflicting interests or might not like the proposed repayment terms. Balancing these interests while keeping the plan workable can be complicated and time-consuming.
Building Trust: Creditors and stakeholders might be skeptical about whether the debtor can successfully reorganize. Gaining their trust is crucial, which means the debtor has to communicate clearly, report their financial situation accurately, and consistently meet their plan obligations.
Risk of Litigation: If creditors feel that the plan isn’t fair or that certain claims are being prioritized over others, they might challenge it in court. This can lead to expensive and time-consuming litigation, which can eat away at the benefits of the streamlined Subchapter V process. On top of that, disputes over things like asset valuation, claim classification, or how specific creditors are treated can cause significant setbacks.
If your small business has been affected by rising prices, rising costs of employment, loans taken out during COVID that cannot be paid back or other setbacks, and you are interested in speaking with an attorney about reorganizing your business, please call the lawyers at Winslow, McCurry & MacCormac, PLLC at (804) 423-1382 and schedule a consultation with their bankruptcy department.
