Subchapter V bankruptcy
Subchapter V bankruptcy is a type of chapter 11 bankruptcy case that is available for both individuals and businesses.
To be eligible for subchapter V bankruptcy, the debtor must be engaged in commercial or business activities (other than primarily owning or operating a single piece of real property) with combined total secured and unsecured debts of $7,500,000 or less, not less than 50 percent of which arose from the commercial or business activities of the debtor.
In subchapter V bankruptcy, a debtor has the ability to, among other things, save real property from foreclosure by curing delinquent mortgage and property tax payments over time, avoid eviction, assume or reject contracts, modify secured claims, including sometimes mortgage liens encumbering a principal residence, and to discharge most types of pre-petition debts, including, but not limited to, credit cards, utilities, medical bills, old income taxes, deficiencies, lines of credit, rejected contract obligations, personal loans, personal guarantees, condo/HOA dues, mortgages and car loans.
The commencement of a bankruptcy case creates a “bankruptcy estate” that is comprised of the debtor’s legal and equitable interests in property. The bankruptcy estate includes tangible and intangible property, debtor’s causes of action, property which is held by someone other than the debtor, inherited property, property acquired under a property settlement with a spouse, life insurance proceeds acquired within 180 days after filing of the petition, and all proceeds, products, offspring, rents, or profits of property of the estate.
In a Subchapter V bankruptcy, a debtor can reorganize and or liquidate.
In subchapter V bankruptcy, property of the estate includes all post-petition property acquired, including the debtor’s post-petition income.
In subchapter V bankruptcy, a subchapter V trustee is automatically appointed to administer the debtor’s estate and oversee its reorganization.However, the debtor remains “in possession” of its assets and operations, and in control of the case. As a debtor in possession, the debtor has the ability touse, sell or lease such property, even outside the ordinary course of business upon Court approval.
The subchapter V trustee’s role is to facilitate the development of and oversee the debtor’s plan of reorganization, appear at major hearings, investigate the debtor’s conduct, assets and liabilities, financial condition, and the operation of the debtor’s business as a going concern; and ensuring that payments are made under the plan.
In subchapter V bankruptcy, a creditors’ committee is not automatically appointed and instead will only be appointed upon a showing of cause.
In every bankruptcy case, the debtor must attend a “meeting of creditors.” In chapter 11 bankruptcy, the United StatesTrustee presides at the meeting of creditors, and orally examines the debtor regarding, among other things, the acts, conduct, property, liabilities and financial affairs of the debtor.
The primary object of a subchapter V bankruptcy case is to achieve court approval (aka “confirmation”) of a subchapter V plan.
A subchapter V plan is a document that separates creditors into different classes, and explains how the debtor is going to treat each class of creditors, and how the debtor is going to either reorganize and/or liquidate.
In subchapter V bankruptcy, only the debtor may file a plan. And, a plan must be filed within the first 90 days of the case.
In subchapter V bankruptcy, a disclosure statement is not generally required.
Confirmation is the process by which a subchapter V plan is approved by the court.
In subchapter V bankruptcy, there is no voting, and the confirmation requirements are relaxed.
In subchapter V bankruptcy, a plan can still be confirmed and approved by the court, evenover the objection of creditors, so long as the plan meets certain criteria.
More specifically, in a subchapter V bankruptcy, for a subchapter V plan to be confirmed and approved by the court over the objection of creditors, the plan must:
- Be proposed in good faith
- Be feasible
- Not unfairly discriminate
- Pay priority unsecured claims in full
- Satisfy the “best interest test” by paying general unsecured claims at least what they would receive in a hypothetical chapter 7 case
- Satisfy the “best efforts test” by paying general unsecured creditors all of the debtor’s projected disposable income over the plan term
Notably, in subchapter V bankruptcy, there is no voting, and no requirement that at least one impaired class of creditors support the plan. Also, in subchapter V bankruptcy, there is no “absolute priority rule” where equity interests are not retained unless general unsecured creditors are paid in full.
Once a subchapter V plan is confirmed and approved by the court, the subchapter V plan governs the relationship between the debtor and creditors going forward.
Finally, in subchapter V bankruptcy, if the plan is consensual, then the debtor will receive a discharge immediately upon confirmation. And, if the plan is non-consensual, then a discharge is entered after completion of all plan payments.