If a business in New York is in financial trouble, the owner has several bankruptcy options. Many businesses choose Chapter 7, which is a liquidation, or Chapter 13, which is a repayment plan. However, businesses that exceed the debt threshold may consider Chapter 11.
Chapter 11 and Subchapter 5 overview
Under business and commercial law, Chapter 11 works similarly to Chapter 13, allowing a business to reorganize debts and stay in operation. The owner commonly has three to five years to complete the repayment plan before discharge, which gives them more time to recover. Chapter 11 is a complex form of bankruptcy, so Subchapter 5 was added to the bankruptcy code in 2019.
Subchapter 5 allows businesses with less than $2.7 million in debts, except insider debts, to file and make the process easier. The filer must indicate it as a Subchapter 5 case on the petition and submit tax returns, balance sheets, and cash flow documents. A filer has 90 days to submit a payment plan to the court, but they may get an extension.
Benefits of Subchapter 5
The creditors must approve of the payment plan in Chapter 11, but the filer doesn’t need approval under Subchapter 5. However, the creditors must get treated equally under the payment plan and be paid the same as they would under liquidation.
Instead of paying administrative fees at once when Chapter 11 starts, Subchapter 5 allows the filer to pay in installments. Subchapter 5 helps the consumer save even more on fees by not requiring a meeting of unsecured creditors and no trustee fees. Subprime Chapter 5 trustees are not actively involved in the process, outside of confirming and helping with repayment plans.
Chapter 11 Subchapter 5 is available for businesses looking for a less costly and faster option. Since bankruptcy remains on credit reports for several years, however, business owners should study their options.