SubV Chapter 11 Bankruptcy

"SubV" Chapter 11—the new (in 2019) faster, simpler, cheaper and more likely to confirm a Plan Chapter 11, than a regular Chapter 11 bankruptcy would be:

Law Firm is available to be hired to represent debtors in "SubV" Chapter 11 cases. "SubV" is the bankruptcy slang for cases filed pursuant to subchapter 5 of Chapter 11 of the Bankruptcy Code. The special provisions of "SubV" appear in 11 USC §1181 through 11 USC §1195 of Chapter 11 of the Bankruptcy Code, plus see 11 USC 101(51D) for the definition of a "small business debtor". Only a "small business debtor" can elect to file SubV Chapter 11.

"SubV" was added to the Bankruptcy Code effective in February 2019. The purpose of "SubV" was to make SubV Chapter 11 bankruptcy simpler, faster, cheaper and more likely to succeed (ie confirm and perform a SubV plan) than regular Chapter 11, because regular Chapter 11 (most often filed big corporations such as Sears, Kmart, JC Penny’s, General Motors, Ford Motors, many restaurant chains, many clothing stores) was too slow, too expensive, too complicated, and too likely to fail, for many individuals and small businesses to be able to use successfully to "reorganize".

Because of the COVID pandemic, the US Congress increased the amount of debt that a person, corporation/LLC or partnership can have, and still be eligible to file SubV Chapter 11, instead of having to file regular Chapter 11, to a maximum of $7,500,000 of noncontingent, liquidated debt, so long as no less than 50% of said debts arose from the commercial or business activities of the SubV debtor. Individuals owning houses with expensive Deed of Trust loans (which are consumer debt, not commercial or business debt) may NOT pass this "no less than 50% of said debts arose from the commercial or business activities of the SubV debtor" requirement.

Debt that is contingent, or is unliquidated, does not count as part of the $7,500,000 debt limit. That $7,500,000 debt limit will only last until 3/27/22 and then will go back to the original SubV debt limit of $2,725,625 on 3/27/22, unless the US Congress passes legislation to extend the $7,500,000 SubV debt limit longer. The $7,500,000 debt limit was adopted by the CARES Act, which increased the $2,725,625 amount stated in 11 USC 101(51D), to $7,500,000. That CARES Act increase went into effect 3/27/20.

Single asset real estate cases are prohibited from filing SubV Chapter 11. Any entity subject to reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 is prohibited from filing SubV Chapter 11. Affiliates of an issuer as defined in section 3 of the Securities Exchange Act of 1934 from filing SubV. (See 11 USC 101(51D) for definition of a "small business debtor", which 101(51D) defines as a person, corporation or partnership that is engaged in commercial or business activities (excluding a debtor whose primary activity is owning single asset real estate), where the "small business debtor" has aggregate, non-contingent, liquidated debts (secured and unsecured) of no more than 7.5 million (excluding debts owed to affiliates/insiders).

SubV has many important benefits for individuals, corporations, LLCs and partnerships which are eligible to file SubV Chapter 11 bankruptcy, as compared with those individuals, corporations, LLCs and partnerships filing regular Chapter 11 bankruptcy cases. Differences between SubV Chapter 11, when compared to regular Chapter 11, do make SubV faster, cheaper, less complicated, and more likely that the SubV bankruptcy debtor will be able to confirm (get approved) a SubV plan, and then perform the confirmed SubV plan, by making the payments to creditors specified in the SubV plan.

The most important benefits of SubV bankruptcy to debtors eligible to file SubV bankruptcy, when compared to regular Chapter 11, include:

1. Per 11 USC §1181(a) and §1191(b), which apply in SubV, the "absolute priority rule" (11 USC §1129(a)(7)--which applies in regular Chapter 11 cases, does NOT apply in SubV cases. The result is that in a SubV bankruptcy, the bankruptcy debtor can keep the debtor’s business, debtor’s real property, all debtor’s additional assets, so long as the SubV debtor proposes, and convinces the bankruptcy judge to confirm, a SubV plan. ("Confirm" convince the Bankruptcy Court approve the debtor’s proposed SubV plan, so the SubV plan goes into effect, binding the SubV debtor and the creditors.
2. Pursuant to SubV section 11 USC 1191(b), a SubV debtor can confirm a SubV plan, even if NO impaired class of claims votes to accept the SubV plan. This is very important, because in a regular Chapter 11 case, if there is an impaired class of claims, the debtor cannot confirm a plan unless at least one impaired class of claims votes to accept the Plan. It is NOT unusual that NO impaired class of creditors votes to accept the proposed Plan, in a regular Chapter 11 case, which prohibits the Bankruptcy Court from confirming (approving) the Chapter 11 plan in a regular Chapter 11 case. Where a debtor/debtor’s attorney think there is a RISK (maybe almost a certainty) that NO impaired class of claims will vote to accept the debtor’s Chapter 11 plan, if the debtor files a regular Chapter 11 case, then filing a SubV Chapter 11—if the debtor is eligible to file SubV Chapter 11—may be the debtor’s only hope of confirming a Chapter 11 (SubV) plan.
3. Only the SubV debtor can file a proposed SubV plan, whereas in regular Chapter 11, under certain defined circumstances, a creditor, a trustee, or even the Office of US Trustee, can file a proposed Chapter 11 plan, and if the party that files such a proposed Chapter 11 plan can get it confirmed (approved by the Bankruptcy Court) it will bind the debtor and all creditors.
4. Usually, no disclosure statement to plan is required, which saves time and money, unless the Court orders a disclosure statement, which is rare. However, the SubV plan is required to give some information regarding debtor’s profitability, etc.
5. Though the SubV debtor must file a proposed SubV plan within 90 days after the SubV debtor files the SubV bankruptcy case, there is no deadline in SubV by which the SubV debtor must get the SubV debtor’s proposed SubV plan confirmed (approved) by the Bankruptcy Court. Plus, once a SubV plan is filed, it can be modified by the SubV debtor.
6. There is a new party in SubV cases, the SubV Trustee, which is appointed by the Office of US Trustee. See 11 USC §1183(b)(7) of SubV. The job function of the SubV Trustee is to help the SubV debtor try to negotiate a SubV plan that the SubV’s creditors will vote to accept. SubV Trustees talk to the SubV debtor/SubV debtor’s attorney about plan terms, and then negotiate with the SubV debtor’s creditors, to try to convince the SubV debtor’s creditors to accept the terms the SubV debtor has or will propose.
7. Unlike in regular Chapter 11 cases, where a Chapter 11 trustee, if appointed by the Bankruptcy Court, displaces the Chapter 11 debtor from being a "debtor in possession", the SubV Trustee does NOT displace the SubV debtor from being a "debtor in possession. Because of this, the SubV debtor remains in charge of the SubV debtor’s business, real property, and other assets, except in the (supposed to be rare) situation where the Bankruptcy Court orders the SubV trustee to take over running the SubV debtor’s business, real property, and other assets. That is only supposed to happen in a SubV case if the SubV debtor demonstrates that the SubV debtor is not trustworthy enough to be left running all the assets. However, there is a downside to a SubV Trustee, which is that the SubV debtor will have to pay for the work done by the SubV Trustee, through the SubV debtor’s SubV plan assuming a SubV plan is confirmed. The more active the SubV Trustee is, the higher the fees of the SubV Trustee will be.
8. If the SubV Trustee is successful in convincing the creditors to vote to accept the SubV debtor’s SubV plan, then the plan is only 3 years long and the SubV debtor makes the plan payments. But if the SubV Trustee is NOT successful in convincing the creditors to vote to accept the SubV debtor’s SubV plan, the SubV plan can still be confirmed (approved) by the Bankruptcy Judge, so that it will go into effect, even though NO CLASS of creditors has voted to accept the SubV Plan. However, if the creditors do NOT vote to accept the SubV plan, then the SubV plan is required to be 5 years long, NOT just 3 years long, and it is the SubV Trustee, not the SubV debtor, which makes the Plan payments, pursuant to the confirmed plan.
9. One thing that is helpful to SubV debtors is that administrative expenses (attorneys fees owed debtor’s attorney, fees owed the SubV Trustee) can be paid over the life of the SubV plan. That is different from regular Chapter 11, where all the administrative expenses must be paid in full, on the effective date of the regular Chapter 11 plan, unless an administrative claimant agrees to be paid later than the effective date of the regular Chapter 11 plan, and it can be hard to impossible to get administrative claimants to agree to that.
10. Also, there is no creditors committee in a SubV case, unless the court orders one, which is rare in SubV, but common in regular Chapter 11. No creditors committee saves money for the debtor, because it is the debtor that is required to pay the attorneys fees of the attorney for the attorney for the creditors committee, which must be paid through the Chapter 11 plan.
11. The SubV debtor does NOT have to pay quarterly fees to the Office of US Trustee. See 28 USC §1903(a)(6)(A). This is very important, because, depending on the case, quarterly fees can be tens of thousands of dollars or more.
12. The SubV debtor does have to file a Monthly Operating Report ("MORs"), each month, in the SubV bankruptcy case, just as debtors in regular Chapter 11 case are required to file MORs. In addition, as in regular Chapter 11, the SubV debtor must complete and submit to the Office of US Trustee a "7 day package" of multiple required items (like proof of insurance) within 7 days after the SubV case is filed.

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