Why Subchapter 5 Bankruptcy Cramdowns Can Save Your Business

Navigating a post-containment landscape may require new ways of thinking about bankruptcy protection

By Scott Ugell

As the pandemic continues to disrupt the U.S. economy, people and small business owners face unprecedented uncertainty. Small businesses, which have been among the hardest hit, are trying to figure out when and how to reopen – if to reopen at all. For some, it might not be as easy as turning the lights back on.

The legal guidance of the recently enacted “SBRA” Small Business Takeover Act 2019, commonly referred to as Subchapter 5, is critical for businesses that may need to restructure to resume operations. The new Bankruptcy Code provides for a more compact and easier version of Chapter 11 Reorganizations for small businesses and individual debtors.

Many companies have sought help from the US government’s CARES ACT stimulus bill by asking for the Payroll Protection Plan (P3). This money begins in the form of a loan from the Small Business Administration and can be canceled at a later date.

What should a business do if it has received PPP loan funds but ultimately decides not to reopen?

A highly recommended option is to arrange to return the money or face the consequence of having to repay the money. The business owner could ultimately be required to return the money if the funds were not used according to the rules of the program.

In light of the need to navigate uncharted territory, many small business owners are wondering

the new bankruptcy statute, chapter 5. How can he protect them? What if bankruptcy can provide them with a window of time to develop a realistic plan for the future.

Filing a Chapter 5 requires time to prepare its very specific filing requirements. Chapter 5 was designed to provide a much shorter window of time to file a reorganization plan, unlike traditional Chapter 11 filing.

In a traditional Chapter 11 filing, a plan must be filed within 300 days of the section 362 order that provides for automatic stay. In subchapter 5, a plan must be filed within 90 days of the order. If the debtor does not file on time, the case may be dismissed against the debtor and the suspension as of right is automatically canceled.

When trying to determine the overarching issues to be eligible for Subchapter 5, a potential applicant / debtor should be able to ask a competent accountant to prepare a balance sheet demonstrating how the business could continue successfully as a ‘going concern’. operation ”in the future. . The business must be able to pay its current operating expenses and, if necessary, have the additional resources needed to pay off any existing debt or potential “backlog” arrears.

Many contractual obligations can be adjusted, which would modify the calculations proposed in the balance sheet. One of those procedures that adjusts both assets and debt from a company’s balance sheet to a financial statement is the law enforcement process.

What is a squeeze and what does it do for the debtor?

A “cramdown” is available in subchapter 5 as a legal way to reduce the debt amount of a specific debt obligation for both secured and unsecured debt. The asset can be a piece of equipment, or it can also be a piece of land, although it is important to distinguish that a “single asset real estate company” is not eligible for the. subchapter 5 title. Using the rollback motion, the amount owed on a loan secured by an asset can be reduced to match the value of the actual asset. Thus, if a debtor owes $ 500 on a piece of manufacturing equipment and the actual value of that piece of equipment is really only $ 200, an adjustment may be requested to reflect the true value of the equipment. . As a result, the company has less debt, still has the equipment it needs to manufacture its product or offer its services, and the capacity of a plan is greatly increased.

Why is the potential for a tightening important to the average small business owner?

By reducing the size of fixed cost debt such as financing existing equipment or the loan on the building where the business operates to its true value, the cost of servicing this debt is significantly reduced, increasing capacity. of the company’s cash flow to support continued operation. Using the Cramdown also helps by allowing for a reduction in how vendors should be paid in such a plan.

However, if a plan proposed in subchapter 5 involves the use of the prohibition motion, the debtor would not be eligible for official discharge from bankruptcy until final payment is made under the plan. . In the event that a plan is confirmed by the court without recourse to escalation, the debtor obtains his release once the plan is confirmed.

Scott B. Ugell is a lawyer with the law firm Ugell, PC in New City, NY. 845-639-7011 ext 101

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