The coronavirus is making it nearly impossible for bankrupt small businesses to predict their future income, adding a surprise wrinkle to a recently enacted law that aims to streamline small debtors’ reorganization, Bloomberg Law reported. Subchapter V of chapter 11 created a new process under which a small business currently with less than $7.5 million in debt can restructure in bankruptcy. The $7.5 million threshold was established by the CARES Act, but sunsets back to the original amount of $2,725,625 unless Congress extends the enhanced limit by March 27. Under the subchapter V, debtors can pay off creditors over a three- to five-year period under a payment plan based on “projected disposable income.” That figure should have been a routine determination based on past business performance. Then the pandemic hit. Covid-19-fueled uncertainty has driven debtors to lowball their projections, while court-appointed trustees have fought to boost creditor recovery. That conflict has become the focal point of bankruptcy cases for small businesses seeking to reorganize under Subchapter V. “Projecting future income is always a trick and the pandemic has made that trick trickier,” said Donald L. Swanson, a bankruptcy attorney at Koley Jessen in Omaha, Neb. Before the law went into effect, bankrupt smaller companies usually overstated their expected income to show they could keep up with payments on secured assets in order to get their plans confirmed, Swanson said. “Subchapter V has flipped that on its ear a little bit,” he said. Debtors with more unsecured debt—such as service-based businesses—now have an incentive to understate projected income to keep plan payments low, Swanson said. Without a committee, the subchapter V trustee may be the only one advocating in court for higher creditor payments in the Chapter 11 plan. Creditors have the right to intervene in a subchapter V case, but many are small businesses themselves and often don’t have the time or resources to do so. Lower payments aren’t all bad news for creditors, however. For many, the real recovery “is not what you’re getting from the distribution in the plan,” said Barbra R. Parlin, an attorney at Holland & Knight LLP in New York, whose practice includes bankruptcy, restructuring, and creditors’ rights. “It’s the fact that they have an ongoing customer. That’s what’s important to them.”
For more news, analysis and statistics on subhcapter V and the Small Business Reorganization Act, be sure to visit ABI's SBRA Resources page.
