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The CARES Act and Subchapter 5 of the Bankruptcy Code


One aspect of the CARES Act that has not received as much press is Subchapter 5 of the Bankruptcy Code and the CARES Act changes to that section of the bankruptcy code. Subchapter 5 was originally created under the Small Business Reorganization Act of 2019 (“SBRA”) on February 19, 2020. The purpose of SBRA was to simplify and reduce the costs of the Chapter 11 process. Chapter 11 typically does not result in successful reorganization, and incurs substantial costs related to professionals and the trustee.


Because the size limit for SBRA Subchapter 5 was approximately $2.7 million of non-contingent, secured and unsecured debt the number of businesses that qualify for Subchapter 5 bankruptcy protection was minimal.


While there was a push to raise the debt limit almost immediately, the Covid-19 impact on the economy created a stronger push to help small businesses survive. The CARES Act increased the debt limit to $7.5 million.


What types of entities qualify for Subchapter 5?


Maximum Debt Level: The total of non-contingent, secured and unsecured debt may not exceed $7.5 million. This is increased from the previous cap of $2,725,625.


Limits on Types of Businesses: Entities that derive substantially all of their income from the operations of a single real property are not eligible for Subchapter 5.


Here is a quick summary of Subchapter 5:


The debtor must file its plan of reorganization within 90 days of filing its bankruptcy petition. However, the bankruptcy court is able to extend the deadline if certain conditions are met. The Covid-19 impact on the economy is expected to provide courts with justification for extensions.


The debtor is able to spread its debt over 3 to 5 years and must devote disposable income to paying creditors.


Administrative expenses may be paid over the life of the plan, rather than at plan confirmation.


Debts are discharged when the debtor completes its plan payments.


A creditor committee is not established unless for cause.


A trustee is automatically appointed; however, the debtor retains the control of its assets and operations. The trustee’s primary objective is to facilitate a consensual plan of reorganization. This means the trustee acts more as a mediator between parties, and does not undertake an immediate investigation of the debtor’s financial affairs. The Department of Justice has selected approximately 250 trustees for these roles as of mid-April.


If a debtor’s principal residence is security for a loan to fund the business, the debtor’s plan may modify the loan on the residence.


Equity holders of the debtor are not required to provide new value if they want to retain their equity interest in the business.


Further questions?

The nuances of bankruptcy require hiring experienced bankruptcy counsel. This article is not meant to replace that important guidance for a debtor contemplating a bankruptcy filing. However, this summary is intended to provide an outline of the Subchapter 5 bankruptcy option troubled small business owners may consider as they work to survive.


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