COVID-19 and state-mandated shutdowns dealt a devastating blow to many Arizona businesses. With a Classic Chapter 11 bankruptcy often costing $40,000 to $75,000 and more, companies on the brink question whether they can even afford to file bankruptcy.
The good news is businesses and individuals now have a better option, thanks to a new form of Chapter 11 the federal government created, ironically pre-COVID-19. The Subchapter V Chapter 11 streamlines the bankruptcy process, and because of COVID-19 the debt limits were raised allowing debtors with less than $7.5 million in primarily business debt to file a Subchapter V — saving as much as 50% in legal fees.
Guidant recently confirmed Arizona’s first Subchapter V Chapter 11 bankruptcy plan and is working on more than 10 others. Lamar Hawkins, the Guidant attorney who also serves as chair of the Arizona Board of Legal Specialization’s Bankruptcy Law Advisory Commission, provides information about this new option that allows business owners to save their companies, and individuals with significant assets and higher levels of debt to restructure their debts into a payment they can afford and discharge significant unsecured debt.
Q: Why are individuals included in a Subchapter V 11?
A: Often a troubled business has owners who have guaranteed much of the debt. The business’s problems cause family problems. It is common to jointly administer the bankruptcy of individuals who own the business and the business itself at the same time. This can result in significant savings over filing separate cases. Subchapter V allows “small businesses” which by definition includes individuals, to elect this bankruptcy option.
Q: How much faster is a Subchapter V 11?
A: Everything is on the fast track. Confirmation can occur within five months of the bankruptcy filing. Guidant filed its first Subchapter V case in March and confirmed the plan in August. In a Subchapter V 11, it is possible for an individual to obtain a discharge almost as fast as they would obtain one in a Chapter 7 proceeding! Compared to the three- to five-year delay in a Chapter 13 or the extensive delay in a Classic 11, Subchapter V 11 gets companies and individuals back on their feet much faster.
Q: What are other differences between a Classic 11 and Subchapter V 11?
A: In the Subchapter V 11, all that must be proven is that the Plan is “fair and equitable.” Although there are various tests for what that means for different types of creditors, that proof is much easier than the Classic 11 requirements.
A special feature of a Subchapter V 11 is the appointment of a Subchapter V trustee. The V trustee is not anything like a trustee in any other form of bankruptcy and this person is really an assistant, helper and negotiator. The V trustee does not run anything — not the business, not the checkbook, nor even the plan filing. The V trustee’s job is to help the debtor through the process, negotiate as needed with creditors and help make sure the debtor gets its plan confirmed as quickly as possible.
Q: What does the Subchapter V 11 process include?
A: The Subchapter V 11 process involves meetings with the United States Trustee’s office; a creditors meeting; having budgets approved if a creditor has an interest in the cash, inventory, and accounts receivables and other “first day” motions; a Plan of Reorganization; and ultimately a payment to creditors over time so that the debtor can obtain a discharge. If the debtor’s plan is “consensual” with the creditors, the debtor can achieve their discharge on the same date as the Court confirms the plan.
Q: What are the requirements for the Plan of Reorganization?
A: The Plan Subchapter V 11 must include a brief history of the business operations of the debtor, a liquidation analysis, and projections with respect to the future operations of the debtor including any restructured payments to creditors.
Presently just about every debtor’s history will have some reference to the problems caused by COVID-19, as well as whatever else caused the debtor to get to the bankruptcy court steps.
A liquidation analysis shows what creditors would get if the debtor had filed a Chapter 7 (liquidation). Commonly, this analysis shows that in a Chapter 7, unsecured creditors would receive little to no return, showing that the reorganization effort is best for everyone.
The debtor’s projections show how the debtor can operate profitably and pay its creditors over time, restructuring secured debt, a payment plan for tax liability, and including a likely nominal return to unsecured creditors.
The Subchapter V 11 Plan classifies creditors into classes similar to a Classic 11. Creditor claims are treated consistently with what rights the creditor might have to collateral, priority status and special circumstances. The Subchapter V 11 Plan can change the terms of pre-bankruptcy contracts. For example, debt on a residential property can be written down to the value of the collateral, the loan payment terms can be modified to be consistent with the marketplace and due dates can be extended. Even taxes can be paid over time.
A standard Subchapter V 11 Plan is for three years, but can be shorter or longer depending upon the facts and circumstances of the case and negotiations with creditors.
Ultimately, unsecured creditors are going to receive the liquidation value of the assets of the estate — a number that is commonly very low. At the appropriate time, the debtor receives a discharge, just like every type of bankruptcy. This is the “fresh start” of the process.
The debtor establishes a separate Plan Fund that, if the plan is consensual, the debtor itself administers to make payments to creditors. If the plan is not consensual, the debtor uses the V trustee to administer the payments.
Contact Lamar, who Super Lawyers recognized for outstanding work in bankruptcy for the last nine years, to determine if a Subchapter V 11 is the best move for your company or your family.