Subchapter 5 Offers Small Businesses Debt Relief


The COVID-19 pandemic brought unprecedented challenges to the United States, with small businesses being hit particularly hard. Recognizing the urgent need to provide relief to these struggling enterprises, Congress introduced a new bankruptcy option known as the Small Business Reorganization Act of 2019, commonly referred to as Subchapter 5. This groundbreaking legislation aimed to offer a lifeline to small businesses grappling with mounting debts during one of the most significant financial crises since the 2008 housing bubble burst. Prior to Subchapter 5, Chapter 11 bankruptcy was the primary mechanism for debt reorganization, but it proved to be complex, costly, and inaccessible for many small businesses lacking the financial resources to navigate its intricacies. Subchapter 5 offers small businesses debt relief by being an efficient, affordable, and accessible alternative, providing a ray of hope for struggling entrepreneurs.


The Genesis of Subchapter 5

The inception of Subchapter 5 was a timely response to the economic turmoil caused by the pandemic. Small businesses, often the lifeblood of local communities, were in dire need of debt relief, and Subchapter 5 offered a beacon of hope. The primary purpose of this new tax law was to facilitate the survival of small businesses by offering a streamlined path to debt relief. Unlike the cumbersome Chapter 11, Subchapter 5 made it possible for businesses to reorganize their debts in a cost-effective manner, empowering them to chart a course toward recovery.


Expanding Debt Allowance with CARES Act

Shortly after its introduction, Subchapter 5 received a boost from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This crucial amendment raised the maximum allowable debt for businesses from $2.7 million to $7.5 million, thereby providing much-needed additional support during the COVID-19 emergency. Importantly, this increased debt allowance was specifically tailored to individuals engaged in commercial or business activities, aligning with the overall objective of preserving businesses and jobs. The CARES Act recognized the unique challenges faced by small businesses and sought to empower them by granting greater flexibility in creating and filing their own debt relief plans, albeit with some limitations.


Limitations and Eligibility

While Subchapter 5 offers hope and opens doors to debt relief for many small businesses, certain limitations exist. To be eligible, the debtor must have at least 50% of their debt attributed to commercial or business activities. Debtors that meet the qualifications for Subchapter 5 will still be required to submit copies of their federal tax returns, statement of operations, a balance sheet and a cash flow statement. Unfortunately, small business owners who operate a single property, such as those managing a solitary Airbnb, are excluded from utilizing Subchapter 5. This limitation underscores the need for continued support and tailored solutions for this segment of entrepreneurs.


Streamlined Process and Faster Reorganization

One of the standout features of Subchapter 5 is its ability to expedite the bankruptcy process, offering small businesses a quicker path to debt relief. Unlike the conventional Chapter 11 proceedings, Subchapter 5 imposes strict time frames. Bankruptcy courts are required to hold a status hearing within 60 days of filing, while negotiations with creditors are expected to be more flexible and accommodating. Moreover, a reorganization plan must be submitted within 90 days of seeking relief. These shorter timelines compel creditors to promptly engage with the case, fostering a more expedited resolution.


Forcing Creditor Acceptance

Another significant benefit offered by Subchapter 5 is its capacity to compel creditors to endorse the debtor’s reorganization plan. Once half of the creditors within each class grant their approval, the plan gains the status of a legally binding contract. Under this arrangement, the debtor possesses the authority to make alterations to creditor rights, which may encompass adjustments to owed amounts, maturity dates, interest rates, and, in certain cases, relief from non-monetary obligations specified in particular contracts. Incorporating personal assets as collateral for business debt, a small business owner could potentially amend the loan agreement within the Subchapter 5 plan, thereby safeguarding themselves from certain adverse outcomes that would typically render filing Chapter 11 unappealing.

Within the plan, the debtor also has the option to categorize all its creditors into distinct classes based on the nature and priority of their claims. These classes typically include secured creditors, priority unsecured creditors, general unsecured creditors, and equity holders. In the standard Chapter 11 proceedings, the appointment of a trustee is not a typical occurrence. In contrast, Subchapter 5 cases automatically entail the appointment of a trustee. It’s worth noting that even with the U.S. Trustee appointing a trustee in these cases, the debtor retains control over the assets and the day-to-day operations of the business.

While a Subchapter 5 trustee may engage in an examination of the debtor’s financial affairs, akin to what a Chapter 7 trustee does, their primary function is to serve as an intermediary between the debtor and its creditors. The trustee plays a pivotal role in crafting a viable bankruptcy repayment plan that ensures fairness and equity for both the debtor and the creditors involved. The presence of an unbiased third party in the negotiation process can expedite and streamline the proceedings, contributing to a more efficient resolution.


Additional Benefits

Subchapter 5 offers several other advantages to small businesses in distress. Notably, it eliminates the need for extensive disclosures, reducing the administrative burden on debtors. Furthermore, administrative expenses can be paid in installments, providing financial flexibility during a challenging period. Importantly, small businesses availing themselves of Subchapter 5 can still access PPP loans, further bolstering their financial stability. Additionally, the absence of a creditor committee for unsecured creditors simplifies the bankruptcy process, making it more accessible for small businesses.



In the wake of the COVID-19 pandemic, Subchapter 5 offers small businesses debt relief and emerged as a vital tool for small businesses struggling with insurmountable debt. By offering a streamlined, affordable, and expedited path to debt relief, this legislation has provided a lifeline to countless entrepreneurs across the United States. Although certain limitations exist, Subchapter 5 has proven to be a game-changer for businesses in crisis, facilitating their recovery and ensuring the continued vibrancy of local economies. As the nation continues to navigate the challenges posed by the pandemic, Subchapter 5 remains a beacon of hope for small businesses seeking to emerge from the financial shadows and thrive once more.

Frequently Asked Questions: Debt Consolidation in California
How does debt consolidation affect credit scores?

Initially, it might cause a slight dip due to credit inquiries. However, consistent payments can improve your credit score over time.

What is the difference between debt consolidation and debt settlement?

Debt consolidation involves taking a new loan to pay off debts, while debt settlement is negotiating to pay less than you owe. Settlement can negatively impact your credit score.

What are secured vs. unsecured debt consolidation loans?

Secured loans require collateral (like a house or car), usually with lower interest rates. Unsecured loans don't require collateral but typically have higher rates.

Is debt consolidation right for me?

It depends on your total debt, interest rates, credit score, and payment capability. It's suitable if you can pay off your debt within five years and secure a lower interest rate than your current debts.

Should I consider long-term financial planning?

Yes, debt consolidation should be part of a broader financial strategy including budgeting, cutting expenses, and building an emergency fund.

How do Chapter 7 and Chapter 13 bankruptcies in California differ?

Chapter 7 involves liquidating assets to pay off debts, while Chapter 13 allows debt restructuring over a set period, usually three to five years.

Can my spouse's bank account be garnished for my debt?

Bankruptcy laws offer protections against such actions, but specifics depend on individual cases and state laws.

How can I learn more about my options?

Consulting a California bankruptcy attorney can provide clarity. Firms like The Law Offices of Christopher Hewitt offer free consultations to explore debt relief paths.

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