A Big Win for Creditors of Small Business Debtors

Since its enactment in February 2020, Subchapter V of Chapter 11 has become a useful vehicle for small businesses that are looking to reorganize or otherwise address operational issues, liquidity issues, or excessive debt through insolvency proceedings. Congress enacted Subchapter V to make Chapter 11 more appealing for small businesses that were previously deterred from filing due to the costs and risks associated with the “traditional” Chapter 11 process. Subchapter V has been a hit among eligible debtors: in 2023, nearly half of all Chapter 11 filings were under Subchapter V.

Why has Subchapter V been so well received by small business debtors? Well, because it provides a less expensive and more streamlined version of the traditional Chapter 11 process, yet gives debtors the ability to reap largely the same benefits of a traditional Chapter 11. So, it is no wonder that small business debtors have embraced Subchapter V. But everything comes at a cost, and in Subchapter V, unsecured creditors swept into a streamlined Chapter 11 process have borne that cost.