Lenders and Small Businesses: A New Dynamic under Subchapter V of Chapter 11

ABA Commercial Law Newsletter

Subchapter V of Chapter 11 of the Bankruptcy Code was enacted for the stated purpose of reducing barriers to the Chapter 11 process for small businesses by streamlining the reorganization process and limiting costs. When enacted in 2019, the definition of “small business debtor,” set forth in section 101(51D) of the Bankruptcy Code, included a debt cap of $2.5 million. In 2020, in a partial response to the COVID-19 pandemic, Congress increased the debt cap to $7.5 million in secured and unsecured non-contingent and liquidated debt.

Between February 19, 2020 and September 30, 2020, more than 2,200 Subchapter V cases were filed in the United States. Approximately 20% of such cases have been confirmed. This confirmation rate is no less than six times higher than the percentage for small business Chapter 11 cases that did not proceed under Subchapter V during the same period. On its face, this statistic suggests that Subchapter V is working to help small to medium size businesses reorganize under Chapter 11. However, the enhanced success rate does not at all address the impact such cases have had on creditors rights and recoveries – particularly on holders of funded debt claims.

In a Subchapter V case, a number of the traditional Chapter 11 rights and remedies of secured and unsecured creditors are limited or modified. This article first identifies several of these limitations and modifications and then proposes strategies lenders may employ to enhance recoveries, when a customer becomes a debtor in a Subchapter V case.

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“Lenders and Small Businesses: A New Dynamic under Subchapter V of Chapter 11,” by Ira L. Herman and Evan J. Zucker was published in the September 2021/Fall 2021 edition of the ABA Commercial Law Newsletter.