For small business owners in New Jersey struggling to stay afloat, Subchapter V bankruptcy can offer a lifeline. Introduced as part of the Small Business Reorganization Act (SBRA) in 2019, Subchapter V is a streamlined version of Chapter 11 bankruptcy designed specifically for small businesses. It provides a more cost-effective and efficient path to reorganizing debt, making it easier for business owners to stay operational while managing their financial obligations. In this post, we’ll explore what Subchapter V bankruptcy is, how it works, and why it might be a good option for struggling business owners in New Jersey.

What is Subchapter V Bankruptcy?

Subchapter V is a special provision under Chapter 11 bankruptcy that is tailored for small businesses. Its goal is to simplify the bankruptcy process, reduce costs, and allow small business owners to retain control of their operations. Unlike traditional Chapter 11, which can be complex and costly, Subchapter V is designed to be more accessible, faster, and better suited to the needs of small businesses.

Key Features of Subchapter V Bankruptcy

Subchapter V includes several key features that distinguish it from traditional Chapter 11 and make it a more attractive option for small business owners:

Streamlined Process

• Subchapter V eliminates some of the more cumbersome requirements of Chapter 11, such as the need for a separate disclosure statement and creditor approval of the reorganization plan. This streamlined approach reduces both time and legal fees.

No Absolute Priority Rule

• In a typical Chapter 11 case, the "absolute priority rule" requires that senior creditors be paid in full before equity holders (such as the business owner) can retain any ownership interest. Subchapter V eliminates this rule, allowing owners to retain their equity interests even if creditors are not paid in full, as long as the reorganization plan is fair and equitable.

Trustee Oversight

• A Subchapter V trustee is appointed to oversee the case, but unlike a Chapter 7 or traditional Chapter 11 trustee, the Subchapter V trustee’s role is primarily to facilitate the development and confirmation of the reorganization plan, rather than taking over management of the business.

No Need for Creditor Committee

• In most Chapter 11 cases, a committee of creditors is formed to represent the interests of unsecured creditors. Subchapter V eliminates this requirement, further reducing costs and complications.

Shorter Timelines

• Subchapter V cases have a 90-day deadline for the debtor to file a reorganization plan, significantly speeding up the process compared to traditional Chapter 11, which can drag on for months or even years.

Who Qualifies for Subchapter V in New Jersey?

Subchapter V is available to “small business debtors” as defined by the bankruptcy code. To qualify, the debtor must:

Be Engaged in Business or Commercial Activities

• The business must be engaged in commercial or business activities, and the debtor must have a principal place of business in the United States.

Have Total Debts Below the Debt Limit

• As of 2024, the debt limit for Subchapter V eligibility is approximately $7.5 million. This amount includes both secured and unsecured debts and is subject to periodic adjustments.

At Least 50% of Debts Must Arise from Business Activities

• The majority (at least 50%) of the debtor’s debts must arise from business or commercial activities, as opposed to personal or consumer debts.

Not Be a Single-Asset Real Estate Business

• Businesses whose primary activity is the ownership of a single piece of real estate (such as a rental property) do not qualify for Subchapter V.

The Subchapter V Process: How It Works

The Subchapter V process is structured to help business owners reorganize their debts efficiently. Here’s an overview of what to expect:

Filing the Petition

• The process begins with filing a voluntary petition for Subchapter V in the appropriate bankruptcy court. The business must provide detailed information about its assets, liabilities, income, expenses, and business operations.

Appointment of a Subchapter V Trustee

• Once the petition is filed, the court appoints a Subchapter V trustee. The trustee’s role is to monitor the case, assist in the development of a reorganization plan, and help facilitate communication between the debtor and creditors.

The Debtor Remains in Control

• Unlike traditional Chapter 11, where a trustee may take over the business’s operations, the business owner (debtor) remains in control of day-to-day operations in Subchapter V.

Filing the Reorganization Plan

• Within 90 days of filing, the debtor must submit a reorganization plan that outlines how it will restructure its debts and pay creditors over time. The plan can include a variety of provisions, such as modifying payment terms, reducing the principal amount of debts, or even proposing a sale of some assets.

Plan Confirmation

• The court must confirm the reorganization plan. In Subchapter V, the plan can be confirmed without the approval of creditors, as long as it meets certain requirements, such as ensuring that the debtor’s disposable income over a 3-5 year period is dedicated to paying creditors.

Discharge of Remaining Debts

• Once the plan is completed, the court issues a discharge of any remaining qualifying debts, allowing the business to continue operating with a clean slate.

Benefits of Subchapter V for Small Business Owners

Subchapter V offers several advantages for small business owners in New Jersey:

Lower Costs

• The streamlined process and reduced administrative requirements make Subchapter V significantly less expensive than traditional Chapter 11.

Quicker Resolution

• The 90-day deadline for filing a plan and the simplified confirmation process mean that cases can be resolved more quickly, allowing the business to recover and move forward.

Retention of Ownership

• Business owners have a better chance of retaining ownership and control of their business under Subchapter V, even if creditors are not fully repaid.

Flexibility in Restructuring

• Subchapter V allows for more flexibility in restructuring debts, which can be crucial for businesses looking to remain operational while paying off creditors.

Is Subchapter V Right for Your Business?

Subchapter V can be an ideal solution for small business owners facing financial difficulties, but it’s not the right option for everyone. It’s essential to consider factors such as the nature of your debts, your ability to develop a viable reorganization plan, and your long-term business goals.

How Robert H. Johnson LLC Can Help

If you’re a business owner in New Jersey considering Subchapter V bankruptcy, having experienced legal guidance is crucial to navigating the process successfully. At Robert H. Johnson LLC, we have extensive experience helping small business owners assess their options, prepare reorganization plans, and work toward a brighter financial future.

Contact us today to schedule a consultation and learn more about how Subchapter V could help your business overcome its financial challenges and thrive once again.