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What the New Subchapter V in Bankruptcy Means to Business Valuers

03.11.2021

A new niche subchapter of the Bankruptcy Code creates an easier and less expensive path for small businesses to reorganize and survive—a welcome lifeline during the pandemic. Valuations have always been a crucial element in bankruptcies. Does this new law create an opportunity for business valuers? This was the topic of discussion during a recent webinar.

Here’s the story. The Small Business Reorganization Act (SBRA) was enacted in August 2019 and went into effect February 2020. The SBRA adds Subchapter V to Chapter 11 of the Bankruptcy Act, which changes or eliminates some of the Chapter 11 requirements, making it more debtor-friendly, explains Michael D. Pakter, a managing member at Gould & Pakter Associates LLC in Chicago, who conducted the webinar.

For example, Subchapter V:

  • Has a shorter timeline (90 days) under which debtors can file plans of reorganization;
  • Is less expensive than Chapter 11 (fewer disclosures, no need to fund a creditors’ committee, no trustee fees);
  • Allows the debtor to retain control of its operations even though a trustee is automatically appointed; and
  • Can protect a small-business owner’s personal assets used to finance a business loan by allowing the debtor to modify the loan.

As enacted, Subchapter V put a cap of $2,725,625 on the amount of debt (noncontingent, secured and unsecured debt) a business can have to qualify. But on March 27, 2020, the CARES Act temporarily increased the cap to $7,500,000 for one year (or longer if Congress extends it), making many more businesses eligible for Subchapter V.

A question from the audience: Have many small businesses filed under Subchapter V? Yes, reports Pakter, although he knows of no actual decisions yet. It’s safe to assume that many more cases will be filed, especially as Paycheck Protection Program funds are depleted. While the number of Subchapter V filings started off slowly, there has been a slow but steady increase in each month this year.

Impact on valuations. At first blush, it would seem that the new Subchapter V will trigger more work for practitioners doing valuations for bankruptcies. But Pakter points out that the trustee who is automatically appointed by the court likely will do much of the financial work, such as developing the projections of disposable income available for creditors. Pakter knows a couple of these trustees and says they are highly qualified to do this kind of work. The new law is designed to keep costs down and the debtor’s hiring of a valuation practitioner would need court approval, so it is not likely that a valuation analyst would be needed in straightforward cases.

However, Pakter noted that if the debtor has certain assets, such as intellectual property or a holding in a private entity, a business or IP valuation analyst likely would be needed. Also, the creditors are free to hire valuation analysts without court approval to challenge the work done by the debtor and/or the trustee, so there could be more opportunities in that regard. Pakter did not recommend that practitioners target the trustees to market their valuation services but to direct efforts to bankruptcy attorneys they work with and/or know to discuss Subchapter V work.

Another impact on valuation practitioners is a change to the “prior claim” issue. Under Chapter 11, if a financial professional had a prepetition claim against the debtor, that professional generally could not continue to work for the post-petition debtor. So, for example, if you were the firm’s financial advisor and it owes you money, you could not work for the firm on the bankruptcy matter. But, under Subchapter V, you can continue to work for the firm as long as your claim is less than $10,000.

For more information. Pakter went into much greater detail about the provisions of Subchapter V during the webinar, Small Business, Bankruptcy and Business Valuation. A recording is available at sub.bvresources.com/TrainingEvent.asp?WebinarID=814 (purchase required unless you are a BVR Training Passport holder).

Source note: This article originally appeared in Business Valuation Update and is reprinted with permission from Business Valuation Resources. This article is intended for informational purposes only.

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