An entity or an individual can reduce and eliminate debts under the new small business Chapter 11 bankruptcy case (Subchapter V). This new Subchapter V came into effect on February 19, 2020.
Why was this new Chapter created? What is the main difference between a regular Chapter 11 and the small business Chapter 11? In summary, the small business Chapter 11 is more streamlined and plan confirmation can happen at lighting speed when compared to a regular Chapter 11. Smaller businesses have the opportunity to restructure debts in a less complicated and time consuming environment. This translates into a cost effective and practical alternative to survive financial difficulties for many small businesses.
Who qualifies for the small chapter 11 bankruptcy? The business (whether an entity or an individual) must be engaged in commercial activity and its total debts – secured and unsecured, must be less than $2,725,625. The CARES Act temporarily (for the next year) increased this debt limit to $7,500,000.00. Also, at least 50% of those debts must come from business activity, not personal consumer debts. In addition, the debtor’s principal activity cannot be a single-asset real estate operation.