Running a small business is always fraught with challenges, but the past few years have brought extraordinary difficulties. The COVID-19 pandemic caused wide-reaching supply chain disruptions that are still impacting the cost and availability of certain business supplies. Many industries face labor shortages that make hiring an ongoing concern. According to an NFIB survey, 40% of small businesses have struggled to fill an open role. On top of all that, persistent inflation ensures profits don’t go as far as they once did, and high interest rates make borrowing more expensive.
With so many headwinds in play, many small businesses are struggling to stay afloat. After all the sacrifices, sweat, and tears you put into building a business, the last thing you want is to lose it all to bankruptcy.
Fortunately, a recent change in bankruptcy law has given small businesses a better option. Bankruptcy no longer has to mean giving up your business and liquidating all assets. With proper guidance, subchapter V could enable you to come out on the other side of bankruptcy with your business intact—and still in your own hands.
A better bankruptcy option: subchapter V
For most small businesses, the terms of traditional chapter 11 are overly complex and cost prohibitive. Until recently, restructuring was only a practical option for big businesses with the resources to navigate a difficult process. Subchapter V was implemented specifically to address this issue and make restructuring a viable option for small businesses.
Subchapter V reduces the costs involved in bankruptcy and speeds up the process in a few main ways:
- You can stretch out the process of paying off debts over 3-5 years out of your projected income, while keeping your ownership interest
- You have 90 days to file a plan, fast-tracking the process relative to traditional chapter 11 cases that can drag on for years
- Certain costly elements of a traditional chapter 11 have been eliminated in subchapter V, namely the unsecured creditors committee is not created and a disclosure statement is no longer required
While no business wants to face a bankruptcy proceeding, an option that lets you keep your business rather than selling it off for parts is far preferable.
4 steps to a ensure a smooth subchapter V filing
While those changes help make restructuring a realistic possibility for many struggling small businesses, that doesn’t mean the process will be altogether easy. A subchapter V filing will mean getting all your business records in order, meeting reporting requirements, and increasing your transparency with lenders, vendors, and the court. For small business owners used to doing things their own way, meeting those requirements can be a challenge. But of course, no small business owner is a stranger to handling challenges.
If you’ve determined a subchapter V filing is the best option to keep your business alive, there are a few main steps you can take to make the process run smoothly.
1. Make sure you’re eligible
Subchapter V is specifically meant for small businesses, which limits which companies are eligible. The main eligibility criteria is the amount of debt you have. Specifically, you must have non-contingent, liquidated debt less than $7.5 million in total.
If your creditors think there’s a chance you’re not eligible, they may contest your filing. Eligibility disputes have the potential to make the process slower, more difficult, and more costly. Confirming that you meet all of the requirements is a good way to protect yourself and avoid expensive disruptions to the proceedings.
It’s worth noting that the debt limit may change in the near future. In 2020, as part of The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), the government raised the limit from $2,725,625. That’s a notable increase. They plan to revisit the decision in 2024, which could have a big impact on which businesses qualify. In the meantime though, if you’re confident your total debt comes out to less than $7.5 million, you have a decent shot at successfully filing for subchapter V.
2. Get your accounting records in order
One of the most important things you can do to help your filing go smoothly is make sure your books are accurate, up-to-date, and well organized. To start, put together clear records that detail your assets, liabilities, and other financial information. Having those prepared will enable you to accurately and efficiently fill out all the required forms and reports for your filing.
For the court, your creditors, and your trustee, your reporting will be their main resource for evaluating your plan. If your records are messy—or worse, include errors—it will hurt your chances for approval.
3. Develop financial projections
The requirements for subchapter V are clear: you need a reorganization plan that includes credible financial projections that show your disposable income over the next 3-5 years will exceed what you would bring in via liquidation. Getting your books in order (step two) will be a big help with this part, since your projections for the future will be based on your business history.
Technically, you don’t have to provide a plan with financial projections right away—you have 90 days from the time you file. Getting it done early though is a smart strategy for speeding up the process and getting approval to move forward sooner rather than later. Plus, leaving this to the last minute puts the process more at risk. If other issues come up before a plan is filed, it can impact your ability to meet the deadline and keep the process on track. There’s no reason to take that risk. Aim to develop your financial projections early in the process or better yet, before you file if possible.
4. Engage with the subchapter V trustee
For every subchapter V proceeding, a trustee is appointed to help put together a consensual plan that works for both the debtor and primary creditors. The trustee is generally meant to be a neutral party who can help facilitate the parties reaching agreement on a plan.
Be upfront with your trustee. Educate them on all the relevant details of your business: the current state of your books, the main challenges you’ve faced, and any likely drivers of future financial performance. The more knowledge they have about your business, the better positioned they’ll be to represent your plan to creditors and (hopefully) get them on board.
Simplify the subchapter V process with expert help
Each one of these steps can be challenging to navigate effectively, especially when you’re dealing with the stress and strong emotions a bankruptcy brings. The best way to make each of these steps easier and ensure you do them right is by working with experienced experts.
Harney Partners has experience as bankruptcy advisors, including work with multiple small businesses navigating the subchapter V process. With how new subchapter V is, finding a firm that has relevant hands-on experience can be challenging. Finding one that also provides the kind of personal touch small businesses need most is even harder. Harney Partners can offer both.
Our advisors can help you determine if pursuing subchapter V is the best option for your business, or if there’s still a chance to achieve an effective turnaround through restructuring consulting or other strategic business decisions.
If subchapter V is your best bet, we can help you tackle each step of the process as efficiently and effectively as possible. The experience will still bring challenges, but you’ll have expert guidance on how to best handle each challenge that arises, while achieving the best possible outcome for your business. If you’re ready to discuss your options and determine the best path forward, get in touch and let us help.
