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The Bankruptcy StrategistFeaturesBankruptcyRegulation

Why Subchapter V Is More Appealing Than Chapter 11 for Small Businesses

By By Stuart B. Newman and Steven H. Newman
June 01, 2022

While Congress began passing legislation regarding bankruptcy relief early in the 19th century, it was not until The Nelson Act of 1898 before the country had its first modern bankruptcy legislation. Our current Bankruptcy Code traces back to the Bankruptcy Reform Act of 1978.

Flash forward almost 50 years to the COVID pandemic, our bankruptcy laws have developed into a well-established mechanism for protection of both individual and business entity protection, but that relief was frequently beyond the reach of debtors who found the process of filing for relief too complicated and, ironically, too expensive. Notwithstanding COVID's almost instantly devastating impact on the economy, the number of bankruptcy filings in this country in 2020 declined more than 30% from the prior two years.

While there may have been other reasons for the decline in filings (for example, state emergency debt moratorium legislation; consumer and business stimulus programs; and even Pandemic-related court closures), Congress, as early as 2019, saw the need to increase the ability of small businesses to utilize the reorganization benefits of Chapter 11 in a more efficient and less expensive procedure. It passed the Small Business Reorganization Act of 2019 (the SBRA), which became effective on Feb. 19, 2020, right at the start of the pandemic in this country. (Another attempt at broad, consumer-based legislative relief introduced that year by Sen. Elizabeth Warren, the Consumer Bankruptcy Reform Act of 2020, died in Congress.)

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