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Small business debtors may avoid a creditors’ committee

On Behalf of | Oct 5, 2021 | Creditors' Rights, Litigation |

Companies attempting to collect commercial debts may need to take extra steps when small businesses file for a Subchapter V bankruptcy. As noted by the Administrative Office of the U.S. Courts, this bankruptcy type does not require the formation of a creditors’ committee.

Commercial debtors owing less than the currently established threshold may opt for a Subchapter V bankruptcy. Although an appointed trustee will oversee the debtor’s submitted reorganization plan, the bankruptcy may proceed without the affected creditors voting to approve the restructuring.

Chapter 11 and Subchapter V — how they may affect creditors

In a traditional Chapter 11 commercial bankruptcy filing, a business submits a reorganization plan that outlines repayment to creditors. Equity may transfer from business owners to creditors while the distressed company remains in operation. The trustee assigned to the case may help facilitate a three-to-five-year payment schedule based on a debtor’s disposable income.

Both Chapter 11 and Subchapter V require business debtors to submit financial documents, income tax statements and a reorganization plan. By eliminating a creditors’ committee, however, a Subchapter V filing may require a creditor objecting to a discharge to file a motion showing cause.

Creditors’ rights under Subchapter V

When a commercial debtor files for bankruptcy through Subchapter V, creditors may protect their interests by filing a complaint and launching an adversary proceeding. This may result in a revocation of a restructuring plan or prevent the discharge of a debt owed to a particular creditor.

Subchapter V may appear appealing to small business owners; it does not require a creditors’ vote to approve a reorganization plan. Creditors may, however, motion the court to appoint a committee to protect their interests.


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