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Overview of Subchapter 5 bankruptcy

On Behalf of | Jun 11, 2021 | Bankruptcy

Bankruptcy in Lexington, Kentucky, isn’t just for individuals to get relief from some debt. It also helps small business owners who struggle with debt by closing the business and paying off creditors. Small business owners can file the same bankruptcy as individual debtors but with the option of Subchapter 5.

Subchapter 5 bankruptcy

Many business owners file for Chapter 7, which means they must sell assets and close the business. Chapter 13 restructures debt without selling assets, but it is only for individuals and sole proprietorships. Chapter 11 works similar to Chapter 13 and allows higher debt limits, but it can be time consuming.

Sometimes, the cost of reorganizing debt under Chapter 11 can get expensive for a small business. Subchapter 5 bankruptcy offers small businesses an alternative to Chapter 11 under the Small Business Reorganization Act of 2019 to streamline the process. However, the debts must not surpass $7.5 million in unsecured debt, and this type of bankruptcy does not apply to debt owed to company insiders. As in Chapter 13, the debtor submits a plan for court approval.

Benefits of Subchapter 5

Chapter 11 and Subchapter 5 allow debtors to keep their assets and remain in operation during the bankruptcy case. They are allowed to be “debtors in possession,” but they still have to report business activities and payments.

The court doesn’t have to ask creditors to approve payment plans, and the debtor can remove unsecured debts. Unlike standard Chapter 11, Subchapter 5 does not appoint a committee to approve unsecured repayment plans, which saves time and expense. All types of bankruptcy enable the automatic stay, which means creditors cannot pursue the debt further.

While Subchapter 5 is much faster and simpler than other types of bankruptcy, the debtor must follow all requirements to get a discharge. A business owner may want to discuss options with their attorney.