Quick overview of Chapter 11 Sub Chapter V for Small Businesses

Quick overview of Chapter 11 Sub Chapter V for Small Businesses

Chapter 11 bankruptcy is commonly known as a “reorganization” bankruptcy. It’s a tool that any individual that meets the requirements, or business, no matter what type of organization it is, can use if they are having trouble meeting their debt obligations.

While individuals can use Chapter 11 bankruptcy, it’s typically used by corporate entities that want to reorganize and continue operating afterward, rather than liquidating their assets and shutting down. 

Chapter 11 bankruptcy can be overly expensive and cumbersome, though, which provides challenges to small business owners. A few years ago, Congress passed a new bill that streamlines the Chapter 11 bankruptcy process, making it more affordable in the process.

Below, we’ll give a quick overview of Chapter 11 Sub Chapter V Bankruptcy for small businesses.

Types of business bankruptcy

There are four types of business bankruptcy, each of which is designed for a different purpose.

The most common type is Chapter 11, as it allows businesses to continue operating after the bankruptcy proceedings. Chapter 7 bankruptcy, by contrast, is a full liquidation and will result in the business immediately dissolving upon the bankruptcy filing.

Chapter 13 bankruptcy is similar to Chapter 11 in many ways, though it’s only a fit really for certain sole proprietors. Chapter 12 bankruptcy is one option that small fishing and farming operations have. It provides a framework for restructuring that family businesses can use so they don’t have to liquidate.

Chapter 11 for business

The reason why Chapter 11 is so popular for businesses is that it allows them to continue operating after the bankruptcy restructuring. Through the process, business owners will enter into repayment plans with their creditors so that they can pay them back over time — as opposed to the previous repayment arrangement.

The restructuring plan is created and then presented to the court, which must approve it before it goes into practice. The creditors will be part of the process as well.

Secured and unsecured debts in Chapter 11

During the Chapter 11 bankruptcy proceedings, most debtors enjoy a moratorium on repayment of general unsecured debts that will last anywhere from about six to 12 months. 

In the same period, though, debtors may still need to pay their secured debts, if the services, goods and/or property is needed to continue operating the business.

The Chapter 11 debtor in possession

The debtor in possession (DIP) is a term that refers to the debtor who will be the one to operate the business after the Chapter 11 bankruptcy petition is filed. The person is a fiduciary and basically has the powers and rights of a trustee in the bankruptcy proceedings.

The DIP can hire outside professionals such as accountants, appraisers and attorneys, as long as the court approves.

Subchapter 5 bankruptcy

Subchapter 5 bankruptcy is made available to certain small businesses that need to file bankruptcy. There are certain limits that apply for business owners to qualify, though.

Non-contingent debt limit

To qualify for Subchapter 5 bankruptcy, debtors must engage in commercial activity and have debt that totals less than $7.5 million total — both unsecured and secured combined.

In addition, at least half of that non-contingent debt must come from activities related to the business. When filing, the debtor has to specify that they want to file under Subchapter 5.

The Small Business Reorganization Act

The Small Business Reorganization Act of 2019 was enacted in August 2019, and became effective in February 2020. The original debt limit was set at $2.75 million, though that was increased to $7.5 million temporarily after the outbreak of the COVID-19 pandemic.

That $7.5 million limit is effective for any Subchapter 5 bankruptcy filed between March 27, 2022, and June 21, 2024. After that date, the limit will revert to the original $2.75 million, unless Congress acts to extend and/or change the limit.

Small business debtors

Subchapter 5 is available only to small business debtors. These organizations are determined based on the size of their debt, not the size of the company itself.

Protection for creditors

The debtor will come up with a repayment plan that will be presented to each class of creditors through the court. Assuming the plan meets all the requirements of the bankruptcy court, the plan will be approved if at least half of the creditors in the class approves it.

Equity security holders

Unlike typical Chapter 11 bankruptcy, Subchapter 5 allows all equity security holders to retain interests they have in a debtor over the objection of non-consenting creditors, and they don’t have to pay all other claims that are higher priority in full.

Subchapter V for individuals

Individuals can also qualify for Subchapter V, just as they can through traditional Chapter 11 bankruptcy. They must meet the same debt limits as outlined above, and must be engaged in business activities.

Single asset real estate debtor

People whose primary business activity is owning a single asset real estate is typically excluded from Subchapter V. There are some exceptions to this rule, including if a debtor’s multiple parcels of property are not considered a single property or project.

A bankruptcy attorney can help

While Subchapter V provides a streamlined approach to Chapter 11 bankruptcy, it’s still a complex and complicated process. Making a mistake can be extremely costly for small business owners.

That’s why it’s always important to hire an experienced bankruptcy attorney who can help guide you through the process. The professionals at Babi Legal have years of experience in business bankruptcy cases, and can help you get through the process in the best situation possible.

Bankruptcy court and the U.S. Trustee or Bankruptcy Administrator

Once a bankruptcy case is filed, a U.S. trustee or bankruptcy administrator is assigned to monitor the case, and all actions that are taken by the parties involved. 

In North Carolina and Alabama, a bankruptcy administrator is the person who will oversee all bankruptcy cases. In every other state, a U.S. bankruptcy trustee will be assigned to monitor bankruptcy cases.

Creditors’ committees

A creditors’ committee is a group that represents all creditors in bankruptcy proceedings. This committee is given broad responsibilities and rights, which includes coming up with a reorganization plan for companies that file bankruptcy, and ultimately deciding whether liquidation would be the best path forward.

Appointment of a case trustee according to the bankruptcy code

The U.S. trustee will appoint a bankruptcy case trustee, after consulting with all parties who have an interest in the case. Once selected, this case trustee must be approved by the bankruptcy court.

The plan of reorganization

The plan of reorganization is a comprehensive and complex document that will be prepared by a business debtor that will detail their plans for how they will repay their creditors over time, and how they will operate once the bankruptcy proceeding ends.

It’ll categorize creditor claims into different classes and describe how each class will be treated. Creditors will receive the plan and vote on it to approve it. Then, the bankruptcy court must give final approval.

Acceptance of the plan of reorganization

Each creditor class must vote on the reorganization plan. Under Subchapter V, at least half of the creditors in each class must approve the plan of reorganization for it to be approved. If not, the bankruptcy court will chime in on the process.

Post confirmation modification of the plan

After the plan is confirmed, it’s still possible to modify it, as long as the details of the modification meet certain requirements under federal bankruptcy code. The court also must determine that there are circumstances that warrant the original plan to be modified.

Post confirmation administration

A court order will initiate the post-confirmation administration of a reorganization plan. Some legal actions will be taken by a creditors’ committee or bankruptcy trustee if the debtor objects to certain claims or if they need to recover funds.

Impact of the CARES Act Mortgage Forbearance Rules and Loan Modifications

Impact of the CARES Act Mortgage Forbearance Rules and Loan Modifications

The CARES Act was passed in March 2020 not long after the COVID-19 pandemic exploded in the United States. It’s a $2.2 trillion economic stimulus package that Congress passed and then-President Donald Trump signed to provide economic relief to people all around the country who were struggling financially.

There were many provisions in the CARES Act, including direct economic stimulus payments to individuals, grants and tax incentives for businesses and more. 

One of the most popular programs available under the CARES Act was mortgage forbearance. This was available to millions of people who had loans that were backed by different federal agencies.

Below, we dive deeper into CARES Act mortgage forbearance rules and loan modifications as they still apply today, four years after the law was passed.


Loans covered under the CARES Act

Loans eligible for mortgage forbearance under the CARES Act are those backed by different federal government agencies and GSEs, or government-sponsored enterprises. 

These include some of the most popular loan programs in the country, such as those:

  • Insured by the Federal Housing Administration (FHA)
  • Administered by the Department of Housing and Urban Development (HUD)
  • Insured or guaranteed by the Department of Veterans Affairs (VA)
  • Insured, guaranteed or made by the Department of Agriculture (USDA)
  • Securitized or purchased by the Federal National Mortgage Association (Fannie Mac) or Federal Home Loan Mortgage Corp. (Freddie Mac)
  • Guaranteed under certain sections of the House and Community Development Act of 1992 that target Hawaiian and American Indian families

These loans could be eligible if they are held by individuals or even some commercial owners and landlords, though the rules for forbearance are different for each type of borrower.


Mortgage forbearance

Mortgage forbearance is a process that provides financial relief to those who qualify under the CARES Act. It’s a way that you can pause monthly repayments on your mortgage so that you can have that extra cashflow to pay for other essentials. This is available to those who experienced financial hardship related to the COVID-19 pandemic.

Covered forbearance period

The initial forbearance period was 18 months if Freddie Mac or Fannie Mae backed your mortgage. To be eligible for those 18 months, though, you had to be in an active forbearance plan by September 30, 2021. The maximum extension period of forbearance after that is 12 months.

Other federal mortgages were also available for a forbearance period of 18 months, but again, only if you were in an active plan as of September 30, 2021. Otherwise, the forbearance period is 12 months.

During the forbearance period, the loan servicer is banned from charging interest, fees or penalties. They also can’t report you to a credit bureau for a missed or late payment, as long as you’re officially in one of the CARES Act forbearance programs.

Options for repaying after your mortgage forbearance ends

When your mortgage forbearance ends, you will be required to resume your monthly repayments as they were before the forbearance began. If you can continue to make those payments, then simply do so to get started again.

However, if you are having trouble working that back into your budget — or if you are still experiencing financial hardship — there are options that you have at your disposal.

Repayment options vary by agency

An important thing to note is that your repayment options following mortgage forbearance depends on the agency that backs your loan. This is why you’ll need to reach out to your loan servicer immediately if you are having trouble repaying your loan once the forbearance period ends.

Some options might include reducing the amount of your repayments or modifying your loan in some other way to provide you with financial relief.

Steps to request forbearance under the CARES Act

To request forbearance under the CARES Act, you must directly contact your loan servicer, which is the company you make your payments to. The servicer will require you to submit certain documentation to prove the reason you need the forbearance, though it’s not extensive.

In most cases, a simple phone call will suffice to get the process started. You may have to follow up and submit documents via email or mail, though.

Mortgage forbearance end dates

The mortgage forbearance periods under the CARES Act have all ended. The Biden administration, in conjunction with the Consumer Financial Protection Bureau, have passed some rules that were meant to prevent a huge number of foreclosures happening once the periods ended. 

Additional Resources on CARES Act Forbearance

Some of the additional resources that the Biden administration has passed include allowing borrowers to resume their mortgage payments and have their missed payments applied to the end of the total mortgage. They might also be able to reduce their monthly payments through a streamlined loan modification.

Borrowers also may have the option to sell their homes to get out of a mortgage they can no longer afford. Again, though, keep in mind that what is available to you will depend on your individual situation and your specific loan.

Penalties that accompany a CARES forbearance request

As mentioned before, your mortgage servicer cannot charge any penalties, interest or fees during the forbearance period, and you cannot be charged any penalties for applying, either. Late fees, penalties and accrued interest can resume once the forbearance period ends, though.

Loan modification and the CARES Act

While the CARES Act itself didn’t provide any official loan modification programs, it did require the lender to offer loss mitigation options to determine the borrower’s feasibility to modify the loan and other related options once your forbearance period ends. Those are described in more detail below.

Refinancing FHA loans after forbearance with your mortgage servicer

One common way that you could gain some financial relief after forbearance is by refinancing your FHA loan. Depending on your situation — including your credit score, how much equity you have in your home and what interest rate you qualify for — refinancing could result in a lower monthly mortgage payment.

A refinance will result in you basically replacing your current mortgage with a new one that has better financial terms. You’ll need to reach out directly to your mortgage servicer to initiate and apply for a refinance.

Refinancing VA loans after forbearance

If you have a VA loan, you will have two options to refinance. The first is called a VA streamline, or a VA IRRRL, or a cash-out refinance. 

The VA IRRRL could be an option if you already have a VA mortgage, want to save money on your monthly payment but don’t want to take any cash from the equity you might have in your home. If you wish to take equity out of your home through a refinance, you’ll have to turn to the cash-out refinance option.

Next steps after mortgage forbearance (including your mortgage payments)

Once your mortgage forbearance period resumes, you’ll be required to resume your monthly payments as they were set before the period began. If you find that you are having trouble making those repayments, it’s important to reach out to your loan servicer immediately to see which options you might have at your disposal.



How will forbearance impact my credit?

Loan servicers were barred from reporting you to a credit agency for missed payments during forbearance periods under the CARES Act.

What happens if your CARES forbearance plan extension is about to expire?

It’s important to reach out to your loan servicer if your CARES forbearance plan extension is about to expire. They will be the ones that could help you with any further financial assistance or other options available.

How do you request a mortgage forbearance extension?

You will have to contact your loan servicer to request a mortgage forbearance extension. They will be the ones to decide whether or not to offer you an extension, based on a number of factors.

Can you exit your CARES forbearance plan early?

Yes. You can request to end your forbearance period early and to be qualified for a repayment option at any time.