The New Small Business Bankruptcy Game: Strategies for Creditors Under the Small Business Reorganization Act

Research output: Contribution to journalArticle

Abstract

Most unsecured creditors have little incentive to act energetically in bankruptcy proceedings. They are unlikely to be paid enough to make it worth the effort. Our bankruptcy law allocates much more power to debtors and to secured claimants. This Article suggests that the Act further erodes the position of most unsecured creditors. Their expected recoveries will remain too low to justify anything other than a relatively passive attitude toward the bankruptcy proceeding, and the Act lowers the protections for passive creditors.

Part I provides an overview of the major features of the Act. It explains how a subchapter V case is initiated and discusses the major differences between subchapter V and standard bankruptcy law. Subchapter V dramatically eases the requirements for confirmation of nonconsensual chapter 11 plans; strongly encourages consensual plans through several new incentives; lowers the debtor's disclosure obligations while removing in most cases the possibility of an official committee of creditors; and requires the appointment of a trustee with a significantly different role than under any other part of the Bankruptcy Code. The Act also permits modification of loans secured by a mortgage on a debtor's primary residence, which the Bankruptcy Code otherwise disallows.

Part II sketches strategic considerations relating to eligibility and election into subchapter V. Subchapter V is voluntary and only open to qualified debtors. This Part explores how creditors may influence or control a debtor's choices or options. Strategies including making agreements with debtors concerning the election; using financial maneuvers to work around the debt limits that control entry into subchapter V; and challenging the debtor's eligibility for relief under the subchapter.

Part III explores the strategic implications of the addition of the subchapter V trustee and the elimination of the creditors' committee. Subchapter V disturbingly lacks reliable mechanisms to ensure that the trustee take creditors' interests seriously. This Part suggests strategies for creditors to explore ways to make their voices heard in light of the Act's institutional re-alignment, which disfavors them. Strategies range from cultivating and working closely with the trustee, to seeking to minimize the role of the trustee, to opposing and seeking removal of the trustee.

Part IV discusses plans of reorganization under subchapter V, and how creditors can strategically seek to shape the outcome of the plan process.

Original languageAmerican English
Pages (from-to)251-284
JournalAmerican Bankruptcy Institute Law Review
Volume28
StatePublished - Jan 1 2020

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