17 Sep SubChapter V Questions and Answers
My company is in financial distress. How can it afford to pay a lawyer to file for bankruptcy when it can’t even pay its bills?
This is a question Dal Lago Law gets asked quite often. Of course, there are costs for filing a bankruptcy, particularly a Chapter 11 Reorganization. However, one of the many benefits of a bankruptcy filing is the “automatic stay”. This occurs in every bankruptcy case and prohibits any creditor (those owed money) from seeking payment from the debtor (those that owe money), if the debt accrued prior to the bankruptcy filing. The “automatic stay” is specifically designed to give the debtor “breathing room” so that it can stabilize its finances and begin the reorganization process. For example, ABC Corp. is paying $5,000 a month on a debt that accrued prior to a bankruptcy. When it files for bankruptcy, ABC Corp. must immediately stop making that $5,000 payment. ABC Corp. can then utilize that savings to fund its reorganization, including its legal fees.
Won’t the creditor commence a lawsuit if ABC Corp. stops making the $5,000 monthly payment?
No. In fact, unless it gets permission from the Court, the creditor must cease all collection on that date of filing the bankruptcy. This is another benefit of the Automatic Stay, which demonstrates the powerful nature of a bankruptcy filing.
What is the best option for ABC Corp. if it has less than $2,725,625.00 in debt?
This is an important threshold for Chapter 11 candidates. If ABC Corp. has less than $2,725,625.00 in debt, then it qualifies for what is known as a “Subchapter V, Chapter 11” (or simply, a “Subchapter Five”). Subchapter V has all of the benefits of a regular Chapter 11 case, but it is designed to be short in duration and less costly. Congress created Subchapter V after recognizing then in many instances a regular Chapter 11 case was cost prohibitive for many companies. Now, Subchapter V gives small businesses the same fighting chance that larger companies – with robust revenue – were given in a regular Chapter 11.
What if ABC Corp has more than $2,725,625.00 in debt?
At this time, ABC Corp. will qualify for a Subchapter V because the $2,725,625.00 debt limit was increased to $7,500,000 in response to the COVID-19 pandemic. However, that increase will only last until March 27, 2022. It is important for ABC Corp. to be mindful of this date. After March 27, 2022, ABC Corp.’s only option would be to file a regular Chapter 11, which will likely cost ABC Corp a lot of money that it could otherwise have used toward a successful Subchapter V reorganization.
By: Mike Dal Lago
Founder, Dal Lago Law