CARES Act and Subchapter V Reorganizations under the Bankruptcy Code
The COVID-19 pandemic has had a huge impact on the health and economic stability of our country. In response to the economic strain that this virus has placed on corporations, and small businesses especially, the Coronavirus Aid, Relief, and Economic Security Act, commonly known as the CARES Act, was signed into law.
The CARES Act includes temporary modifications that could be of special interest to small business owners. Here, the attorneys at the Sutton Law Firm help their clients from Bartow, FL, and other areas of Polk county understand how the CARES Act affects Subchapter V reorganizations under the Bankruptcy Code.
Subchapter V Bankruptcy Reorganizations for Small Businesses
Before we discuss how the CARES Act has changed Subchapter V reorganizations under the Bankruptcy code, let us briefly explain what Subchapter V is. Subchapter V is a subcategory of Chapter 11 of the Bankruptcy Code. Subchapter V only came into law in February of 2020, due to the passage of Small Business Reorganization Act.
Chapter 11 of the Bankruptcy code allows business owners to reorganize their debts so that they can continue to operate while they pay off their debtors. While Chapter 11 offers many benefits, it is a time consuming and costly process, so it may not benefit all small businesses.
Subchapter V gives our clients from Bartow, Winter Haven, Lakeland, and surrounding areas who run mom and pop-type small businesses a more streamlined process for reorganizing through bankruptcy. This process offers several of the same features as Chapter 11, but it cuts many of its time and cost restraints. Essentially, bankruptcy reorganization under Subchapter V gives small businesses the opportunity to get out of bankruptcy in a shorter period of time.
Another notable benefit of Subchapter V is that it does not require compliance with the “absolute priority” rule. Under Chapter 11, unsecured creditors must be paid in full before equity owners are able to retain their interests. Subchapter V essentially eliminates this mandate.
CARES Increases Debt Limits for Subchapter V
Before the CARES Act was signed into law, the only businesses that could elect for Subchapter V treatment were those who carried less than $2,725,625 in secured or unsecured debt. While many family-owned businesses are within this threshold, it excluded numerous other small businesses. To allow for more businesses to file for Subchapter V treatment, the CARES Act has temporarily increased the eligible debt limit to $7,500,000.
The CARES Act will allow many businesses who previously only qualified for Chapter 11 to file for Subchapter V instead. This can pause a business’s debt obligations and give them time to negotiate with lenders and creditors, while still allowing them to resume operations when the COVID crisis permits.
When Is the CARES Act in Effect?
The CARES Act went into effect on March 27, 2020, so the revisions apply to any business seeking reorganization on or after that date. It is important to stress that the debt limit increase provided by the CARES Act is temporary. The revisions are only valid for 12 months, so unless further legislation is passed, they will expire in a year. Those of our Polk county clients who want to explore their eligibility for Subchapter V reorganization under the CARES Act should do so quickly.
Schedule a Consultation
Small businesses are facing unprecedented challenges right now. If you are trying to keep your business in operation and would like to discuss your options for keeping your business and keeping it operating, call a knowledgeable attorney at (863) 533-8912, or contact Sutton Law Firm online.