How Does Subchapter V Affect Creditors Compared to Regular Chapter 11?
Creditors do not play the large role in Subchapter V that they do in traditional Chapter 11 bankruptcy, and their protections are limited.
Subchapter V of the U.S. Bankruptcy Code was created by the Small Business Reorganization Act (SBRA), which was passed in August of 2019 and went into effect in February of 2020. The Act was created to provide a streamlined Chapter 11 process for small business owners.
Subchapter V allows a bankruptcy case to proceed more quickly through the courts while also lowering the cost for small business debtors. Protections for creditors are also greatly limited during Subchapter V, as they do not have as much leverage or voting rights at all, and they also have less input on the reorganization plan.
What is the Role of Creditors in Traditional Chapter 11 Bankruptcy?
In a traditional Chapter 11 bankruptcy case, creditors are given quite a bit of protection. One of the first steps in the process is the formation of a committee of unsecured creditors. The committee represents the interests of all unsecured creditors involved in the case and will negotiate with the borrower on behalf of all unsecured creditors.
Creditors in Chapter 11 are divided into different classes, depending on the nature of the debt and the priority for repayment. During Chapter 11, at least one class of creditors must vote on and approve the proposed repayment plan. This provides creditors with a great deal of leverage during the negotiation process. Chapter 11 also includes an absolute priority rule, which stipulates that creditors are paid before any junior class, such as shareholders, can receive any property.
Before any creditors can vote on a proposed reorganization plan in Chapter 11, a detailed disclosure statement must be submitted and approved by the court. This statement must contain extensive financial information. After a certain period of time, any interested party, including a creditor, can propose a plan.
What is the Role of Creditors in Subchapter V?
The role of creditors in Subchapter V is quite different from traditional Chapter 11 bankruptcy. There is no appointed creditors’ committee, meaning there are fewer creditors involved in the case. The creditors that are involved also do not have the same type of leverage during negotiations. This is because whether a creditor votes on the proposed reorganization plan, the court can still approve the plan.
The absolute priority rule also does not apply in Subchapter V. This means all owners, including shareholders, can retain their equity in the business even if the unsecured creditors are not paid in full. A disclosure statement is also not required in Subchapter V, expediting the process and making less information available to the creditors regarding the borrower’s financial situation.
Creditors also do not have any input on the reorganization plan, nor can they propose their own. Debtors must create the plan and submit it to the court within 90 days of filing bankruptcy, pressuring creditors to act more quickly than in traditional Chapter 11.
Our Bankruptcy Lawyer in West Palm Beach Can Help with Your Case
Subchapter V is quite different from traditional Chapter 11, including the impact it has on creditors. At Brian K. McMahon, P.A., our West Palm Beach bankruptcy lawyer can help you through the process so you obtain the best outcome possible. Call us now at (561) 658-1789 or contact us online to schedule a consultation and to learn more about how we can help.