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How small businesses can benefit from Subchapter 5

On Behalf of | Oct 10, 2022 | Bankruptcy

Many businesses in Kentucky use Chapter 11 bankruptcy to continue to operate while reorganizing their finances. However, some smaller operations found filing too complex and expensive. To help these businesses, the federal government added Subchapter 5 to the Chapter 11 bankruptcy code to make reorganization more accessible.

What Subchapter 5 does

Chapter 7 and Chapter 11 are the two types of commercial bankruptcy filings available to businesses. Chapter 7 is a liquidation bankruptcy, while Chapter 11 allows a company to keep operating. Subchapter 5 of Chapter 11 gives small businesses a simplified process for paying down their debt if they are earning a profit. Businesses eligible for Subchapter 5 must have less than $7.5 million in debt, with none owed to company insiders. At least 50% of debt must come from business activities. Companies are not eligible if the entity’s primary activity comes from running a single location.

Subchapter 5 advantages

Creditors still have some protections under Subchapter 5, yet struggling businesses receive a number of advantages. These include:

  • Continued operation as long as you stick to the payment plan
  • No creditor approval for payments
  • Only your business can submit a plan
  • No disclosure needed
  • Special trustee monitors operations
  • Expenses paid in installments

Getting through the bankruptcy process

Many businesses wait until the last possible moment to file bankruptcy. However, the sooner you begin exploring the process, the more options may be available. Beginning the process as soon as you realize you are in financial trouble will also allow you to carefully consider your situation to make the best decision for your future. You may be able to use other alternatives to reduce some of your debt before filing for Chapter 11.

Chapter 11 gives your business a second chance at viable operation. The key to reorganization is forward-thinking. Even if your circumstances require you to file as soon as possible, you may be able to formulate a viable plan with the help of financial advisors who can recommend methods to make your operations debt-free eventually.