By Edward Kaye
While the United States Congress continues to play politics in extending additional relief to small businesses, financial hardships plague many in the luxury ground transportation industry. Specifically, as a second round of much-needed PPP money and the CERTS Act lies in the balance with an uncertain future, many transportation companies are running out of cash and unpaid debts are piling up.
Do not despair: Relief is available that allows small business owners to file for bankruptcy protection and stay in control of their operations. Subchapter V to the rescue!
Subchapter V of Chapter 11 is a relatively new statue known as the Small Business Reorganization Act of 2019. It was enacted by Congress on February 19, 2020, just weeks prior to the COVID-19 pandemic. Subchapter V is an easier, less expensive, and quicker version of Chapter 11 reorganization for small businesses and individuals provided their debts are primarily business debts and “engaged in commercial or business activities.”
Originally, Congress capped secured and unsecured debts under Subchapter V at $2,725,625, but the CARES Act increased this ceiling to $7,500,000 until March 2021. The hope is that this increase will benefit debtors, creditors, and the economy in general. Of note, most U.S. ground transportation companies will fall within this limit and will qualify to file under Subchapter V.
Even though Subchapter V still falls into the category of a bankruptcy, filing in today’s economic climate will likely temper any stigma that declaring bankruptcy once had. There is a social and economic reality that people are simply not comfortable traveling because of COVID, and once-thriving businesses are now on their knees praying for help to survive. In most cases, this global pandemic—and the travel stoppage that ensued—wasn’t in your control.
Originally, Congress capped secured and unsecured debts under Subchapter V at $2,725,625, but the CARES Act increased this ceiling to $7,500,000 until March 2021.
To file under Subchapter V, the business needs to submit a recent balance sheet, statement of operations, cash flow statement, and the most recent federal tax return. If you are unable to provide all the items, you must file a statement under the penalty of perjury that the form has not been prepared and a federal tax return has not been filed.
Compared to a traditional Chapter 11, the process is much faster: A Subchapter V debtor has 90 days to file a plan and the court will hold a status conference within 60 days after the plan is filed. There is no creditors’ committee unless there is cause, most likely debtor fraud. The plan must be feasible—in other words, realistic—and debtors must commit all of their disposable income to repay creditors for the plan term of at least three years, but not to exceed five years. A trustee is automatically appointed but the debtor retains equity and control of its assets and operations. The trustee’s role is essentially to act as a mediator to facilitate a settlement among creditors. There are other important benefits that Subchapter V affords transportation companies. For instance, the absolute priority rule is eliminated, meaning it is much easier to get a plan approved since a debtor can confirm a plan over the objections of unsecured creditors. Additionally, if the debtor used their principal residence as security for a loan to fund the business, the Subchapter V plan may modify the loan and save the residence from creditors. But, probably the most important impact of Subchapter V for the ground transportation industry is that cramdown is much easier. Essentially, a cramdown is a restructuring of debt that the creditor is forced to accept as part of the bankruptcy.
In Subchapter V, there is no limitation on cramdown of auto loans. This means that in most cases the vehicle lender will be forced to accept payments equal to the market value of the vehicle, even if the value is less than the amount of the loan. Think about this in today’s market—the benefits are significant. Unfortunately, it does not appear that vehicle leases will be treated the same as vehicle loans for Subchapter V cramdown purposes. Be sure to understand the contracts you signed or engage an expert to help you.
While some experts anticipate Subchapter V filings to surge once PPP funds run out entirely, especially among small businesses that cannot meet the loan forgiveness criteria, filings so far have been off to a slow start.
As company capital continues to dry up, loan and lease deferrals end, cash flow continues to diminish, and lenders pull back grace periods, many transportation companies are at a tipping point. Do you continue supporting the operation, do you scale down, or do you cut your losses, wind down operations, and close the doors? Subchapter V may be your best solution and give you time to put difficult decisions on pause while Congress plays politics in deciding the fate of the CERTS Act and give you extra time to negotiate with your lenders, landlords, and other creditors. [CD1220]
Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.