September 18, 2020

CARES Act Expands Eligibility for New Small Business Bankruptcies

by Jim Coutinho, Allen Stovall Neuman Fisher & Ashton LLP

Much of the focus of the CARES Act has been on the Paycheck Protection Program, and rightly so. But as companies begin to exhaust their PPP funds—and as creditors begin to lose patience and want to be paid—many businesses are struggling to stay afloat. Thankfully, however, the CARES Act has given additional relief for small businesses through an easily overlooked bankruptcy reform.

The CARES Act expanded eligibility for a new and powerful type of bankruptcy reorganization called Subchapter V. This new type of bankruptcy, a subset of Chapter 11, became effective in February of this year, but it was initially limited to businesses with debts of less than $2.7 million. In response to the economic impact of COVID-19, that eligibility limit has been raised to allow filings from businesses with up to $7.5 million in debt.

Subchapter V provides much needed reforms to small business bankruptcies. It removed a rule that was often a barrier to small business owners retaining their ownership interest in their company. It made it easier to confirm a plan of reorganization over the objection of a creditor, so long as the Bankruptcy Court finds that the plan is fair and equitable. It installed a Subchapter V trustee to help bring parties to the negotiating table. And, perhaps most significantly, this new type of bankruptcy filing substantially reduced the administrative burdens, attorney fees and costs that previously made Chapter 11 relief impossible for small businesses.

As forbearance agreements with lenders expire, as landlords start asking for back rent, and as trade creditors stop selling on credit, a Subchapter V bankruptcy may be the lifeline needed to keep many companies in business. Until next spring, the eligibility covers many more entities that were not previously covered, and hopefully many business owners can use Subchapter V to find the relief they need.


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