By Josh Shilts, CPA, ASA, ABV/CFF/CGMA, CFE
July 31, 2020
The ugly truth of the COVID-19 Pandemic is that some businesses will succumb to the impact it has had on their operations. These businesses do not have the “pockets” to weather this storm and owners are going to be faced with decisions that impact employees, their business and ultimately themselves. While a significant amount of attention has been given to government programs that provide liquidity recent legislation and an update to the CARES act provide small business debtors with another form of bankruptcy protection.
In 2005, amendments to the US Bankruptcy Code provides provisions designed to help small businesses under Chapter 11; however, the process will still expensive and confronted owners with hurdles in confirming a plan that allowed for retention of ownership interests. In February 2020, the Small Business Reorganization Act went into effect allowing small businesses to file under this new Subchapter V. This new provision allowed for significant cost savings by streamlining the process as well as allowing owners to maintain equity interests, even if no creditor votes in favor of the plan of reorganization.
The Subchapter V’s cost savings are directly attributable to:
Eligibility for the Small Business
Reorganization Act is based on a modified definition of a Small Business Debtor. To qualify under the Act:
It is important to note that the CARES Act raised the debt limit from $2,725,625 to $7,500,000 until March 27, 2021 for Subchapter V cases. This only applies to those small businesses that are eligible and elected Subchapter V. Objections to eligibility may be raised and small businesses need to be aware of them. If you are an owner of a small business, you need to examine the total debt across all affiliated debtors to make sure it does not go over the $7,5000,000 level.
Once eligibility is confirmed the small business will have to work with counsel and the financial advisor to develop a plan. The plan includes current financials, valuation of assets, solvency, a 13-week cash flow, lease analysis, projections, taxes and a petition, SOFA & First Day declaration. Under the plan the history of operations along with a liquidation analysis, debtor payment projections and submission of all or such portion of the future earnings/income of the debtor to supervision and control of the trustee as is necessary for its’ execution.
Small business should seek counsel from an experienced bankruptcy attorney as these plans move much faster and require in-depth knowledge of the bankruptcy plan. This is not a good option for an inexperienced attorney or financial advisor to assist the small business client if they are new to the bankruptcy and reorganization process. There are several legal requirements in addition to eligibility and submission of a plan that a skilled attorney can help a small business owner navigate.
Attorneys and financial professionals who may not be familiar with the Bankruptcy process need to be on the alert more than ever to assist clients who may need to consider bankruptcy as an option. The purpose of this article is to educate practitioners to identify if their small business client may be eligible to participate in the Subchapter V process.
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Information contained in this article is provided for informational purposes only. It should not be misconstrued as legal or accounting advice or intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion. It presents matters of general interest relating to business valuation, forensic accounting, and litigation support topics for educational purposes only. Shilts CPA, PLLC disclaims all liability concerning actions taken or not taken based on any or all of the contents of this article.
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