Small business bankruptcy reorganization was designed to get simpler. Subchapter V of Chapter 11, enacted as part of the Small Business Reorganization Act of 2019, was created to give small and mid-sized businesses a faster and less costly path to restructuring compared to traditional Chapter 11. But court decisions have continued to test the boundaries of who qualifies for Subchapter V and what that process actually allows — including a significant ruling from the U.S. Court of Appeals for the Fifth Circuit that created a new challenge for corporate debtors seeking to reorganize under this streamlined framework.
Mandelbaum Barrett PC’s corporate law attorneys monitor developments in bankruptcy and restructuring law that affect business clients throughout New Jersey and New York. Understanding how circuit court decisions shape the availability and structure of reorganization options is an important part of advising companies facing financial stress.
What Is Subchapter V of Chapter 11?
Subchapter V was added to the Bankruptcy Code by the Small Business Reorganization Act of 2019. It was designed to streamline the reorganization process for small business debtors by eliminating several burdensome requirements of traditional Chapter 11. Under Subchapter V, debtors do not need to obtain creditor approval for their reorganization plan, no official creditors’ committee is formed, and a standing trustee is appointed to facilitate the process and encourage consensual plans between debtors and creditors.
Eligibility for Subchapter V is subject to a debt limit. During the COVID-19 pandemic, the CARES Act temporarily raised that ceiling significantly, allowing more businesses to qualify. That elevated threshold subsequently expired, returning to the prior lower level and affecting which businesses could access the streamlined process in subsequent proceedings.
The Significance of the Fifth Circuit’s Decision
Circuit court decisions on bankruptcy law carry national significance because bankruptcy is governed by federal law and courts across circuits look to circuit-level rulings for guidance on emerging questions. When the Fifth Circuit addresses an eligibility or procedural issue under Subchapter V, its reasoning affects how debtors, creditors, and trustees approach similar situations nationally, including in the Third Circuit, which covers New Jersey.
According to the United States Courts, Chapter 11 reorganization — including Subchapter V — provides businesses with the opportunity to restructure their financial affairs while continuing to operate, which is one of the foundational features of the American bankruptcy system. Decisions that restrict or clarify access to these mechanisms have direct consequences for businesses considering their restructuring options.
What Businesses Should Consider
Companies that are monitoring their financial position and considering whether restructuring may eventually be necessary should understand how recent court decisions affect their eligibility for Subchapter V and what alternatives are available. The eligibility rules, procedural advantages, and strategic considerations are all relevant factors in determining how to approach a potential reorganization. Consulting with counsel before a financial situation becomes acute provides more options and better outcomes than waiting until a crisis requires immediate action.
Contact Mandelbaum Barrett PC for Corporate Restructuring Guidance
If your business is facing financial challenges and you are considering restructuring options, the corporate law team at Mandelbaum Barrett PC can help you evaluate the approaches available under current law and develop a strategy suited to your situation.
Reach out through our contact page to speak with our team. We are here to help you navigate the legal and strategic dimensions of business restructuring.