Subchapter V, introduced under the Small Business Reorganization Act of 2019 (just before the global pandemic), streamlines Chapter 11 bankruptcy for small businesses with debts (currently) under $3 million (there is a move to raise this debt limit). SubV simplifies procedures by eliminating competing plans, disclosure statements, and allowing debtors to retain equity while restructuring debts. Plans must allocate all disposable income to creditors over 3-5 years and ensure creditors receive at least liquidation value. This process is faster, more cost-effective, and debtor-friendly compared to traditional Chapter 11.
Key Considerations for Creditors in Subchapter V Bankruptcy Negotiations
When creditors are negotiating a Chapter 11 plan during a Subchapter V bankruptcy, they should consider the following key factors:
Company’s Financial Health
Assess the company’s current financial situation, including cash flow, profitability, and asset value. Understanding its financial stability can help determine a realistic repayment schedule.
Repayment Terms
Negotiate clear and structured repayment terms, including the amount, frequency, and timeline for payments. Ensure that the terms are manageable for the company to increase the likelihood of successful repayment.
Secured vs. Unsecured Claims
Identify whether the debt is secured or unsecured. Secured creditors have a higher claim priority and are in the best (and sometimes only) position to recover in SubV.
Interest Rates
Discuss the possibility of adjusting interest rates on the debt. Reduced rates may make repayments more feasible for the company.
Potential for Future Business
Consider the value of maintaining a business relationship with the debtor company. Future contracts or work may offset some losses if the relationship remains strong.
Risk of Non-Payment
Evaluate the risks associated with the company’s ability to pay. If the company is struggling significantly, a more cautious approach may be necessary.
Flexibility
Be prepared to offer flexibility in the repayment plan, allowing for adjustments based on the company’s performance and cash flow fluctuations.
Involvement in the Plan
Request to be actively involved in the development of the repayment plan. This can include input on timelines, milestones, or performance benchmarks that the company should meet.
Legal and Administrative Costs
Keep in mind that ongoing legal and administrative costs can impact overall recovery. The goal of SubV is to ensure an efficient process that minimizes these expenses, maximizing the value of the outcome.
Exit Strategy
Know what the exit strategy is in case the company fails to meet the repayment plan. Discuss potential repercussions and how creditors might proceed, such as asset liquidation or further negotiations.
Seeking Legal Guidance
Considering these factors can help creditors create a realistic repayment plan that addresses their needs while giving the company a fair chance to stabilize and recover financially.
The attorneys in Perkins Thompson’s Creditors’ Rights and Bankruptcy practice group are here to guide creditors through commercial and consumer bankruptcy, insolvency, and recovery matters. For assistance with these issues, please contact Anthony Manhart.
