Chapter 5 May Provide A Fresh Start Post-COVID

Thursday, September 24, 2020

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COVID -19 has stressed many businesses to the breaking point. In spite of PPP loans and EIDL $$$ many small business owners are facing financial challenges, but want to stay in business. Up until now their options were limited. See our prior article HERE: Is Bankruptcy The Best Choice In Bad Economic Times?

What are your choices when your company is small and unable to afford the time-consuming, expensive and difficult Chapter 11 reorganization process? If you wish to restructure privately, you will not have the protection of the bankruptcy court. Don’t take a chance and wind up closing your doors, consider instead a new option made possible by the Small Business Reorganization Act (SBRA) passed on February 19, 2020.

What is the NEW option? Known as “Chapter 5,” the new bankruptcy chapter seeks to streamline and simplify the Chapter 11 process, give the borrower company more control and make it less costly so that it has a better chance of exiting bankruptcy in a stronger position. The CARES Act temporarily allows companies with up to $7,500,000 (up from $2,725,625) in secured and unsecured non-contingent and liquidated debt to use Chapter 5 to reorganize.

Differences include:

  • 90 days to file a plan compared to 300 for Chapter 11.
  • No creditors’ committee required. Under Chapter 11, a creditor committee adds time and expense, and one unsatisfied creditor can hold up the whole process.
  • Chapter 5 retains the trustee, however debtor companies can spread the trustee commissions over the life of the reorganization.
  • The “absolute priority” rule has been eliminated under Chapter 5, thus providing flexibility in giving all creditors a chance to recoup a portion of their balances.
  • Under Chapter 5 a debtor can keep their equity, and may make payments to creditors of residual or disposal income over a three- to five-year period.