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Some differences between a Chapter 11 and Subchapter V bankruptcy

In 2020, the Small Business Reorganization Act went into effect, which may provide relief similar to a Chapter 11 bankruptcy. Business owners experiencing hardship may file either petition. A company cannot, however, generally owe more than $2.7 million in liabilities to qualify for a Subchapter V, as described by CFO magazine.

By filing for Chapter 11, businesses may reorganize their outstanding debts regardless of the amount owed. With a Subchapter V bankruptcy, however, business owners may restructure their debts and retain equity without the scrutiny of a creditors’ committee.

When a business owner may consider each petition

Owners may consider a Chapter 11 when they have the resources to work with a bankruptcy trustee. Submitting a petition generally results in the creation of a creditors’ committee. Depending on the debts, however, some creditors may begin an adversary court proceeding. If successful, the trustee may order a business to turn over assets or some of its equity to an unpaid lender.

Business owners who qualify to reorganize through a Subchapter V may prefer this method because it could offer a quicker resolution without facing a creditors’ committee. Companies experiencing a temporary reduction in revenue and predicting a rebound in the near future may benefit from restructuring without interference from an aggressive creditor’s adversary action.

Documents required for a business bankruptcy

When considering bankruptcy, business owners need to create an actionable plan for reorganizing and then communicate with a trustee throughout the procedure. A petition generally requires business tax returns, a balance sheet, an income statement and a statement of operations, as explained by ABL Advisor.

A payment arrangement or restructuring plan under the U.S. Bankruptcy Code may require a creditor’s approval. Business owners having trouble meeting their obligations may wish to review all the available options before filing a petition.