Chapter 5 Bankruptcy Cares Act

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. Read on to learn more.

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

Source: https://www.focusmg.com/post/the-cares-act-and-subchapter-5-of-the-bankruptcy-code