Individuals Can Restructure Personal Guaranties of Defunct Business’s Debt in New Bankruptcy Subchapter VEarlier this year, Chapter 11’s new Subchapter V became a part of the Bankruptcy Code when the Small Business Reorganization Act of 2019 (SBRA) became effective. Very shortly thereafter, the CARES Act expanded the debt limits for a business or individual to qualify as a debtor under the SBRA. In the wake of these new laws, certain individual debtors have begun seeking Subchapter V bankruptcy relief as a means to restructure personal guaranties of defunct business debts.

Section 101(51D) of the Bankruptcy Code provides the requirements for an entity or individual to qualify as a debtor in bankruptcy. To qualify as a debtor under the SBRA, a business or individual must be “engaged in commercial or business activity” with debts no greater than $7.5 million (as amended by the CARES Act) and “not less than 50 percent of which arose from the commercial or business activities of the debtor.” Within these parameters, bankruptcy courts have recently found that individuals with debts comprised of at least 50% of business debts, such as individual guaranties, qualify to be small business debtors under the SBRA.

For instance, the Bankruptcy Court for the District of South Carolina held in In re Charles Christopher Wright that an individual debtor whose debts were connected to his ownership of now defunct businesses met the requirements to be a small business debtor under the SBRA. In that case, the court found that 56% of the debts owed by the debtor constituted business debt associated with the debtor’s defunct businesses, and the total debt owed was within the statutory limit for the SBRA. Finding that the SBRA does not require debtors to be “currently engaged in business or commercial activities,” the bankruptcy court held that the debtor qualifies as a small business debtor because “he is ‘engaged in commercial or business activities’ by addressing residual business debt….”

Similarly, the Bankruptcy Court for the Eastern District of Louisiana in In re Andrew and Christine Blanchard held that individual debtors’ guaranties of business loans constituted business debt such that the debtors qualified to be small business debtors under the SBRA. As with the Wright Court, this court found that the Bankruptcy Code does not expressly designate that a small business debtor under the SBRA must be currently engaged in commercial or business activities. Accordingly, because the majority of the debtors’ debts arose from operation of the debtors’ currently operating businesses, as well as their now defunct businesses, and were in an amount below the SBRA’s statutory debt limits, the court held that the debtors qualified to be debtors under the SBRA.

Looking Ahead: What Creditors Can Expect as Individual Debtors with Business Guaranties Seek Subchapter V Bankruptcy Relief 

The SBRA provides a new avenue for individual debtors to restructure and discharge their personal guaranties of business debts. As bankruptcy courts are interpreting the SBRA to allow individual debtors with business debts connected with defunct businesses, even more individuals will qualify as debtors under the SBRA. Thus, creditors should familiarize themselves with what to expect when getting involved in a Subchapter V bankruptcy case.

After successful completion of a Subchapter V plan, individual debtors will receive a discharge of their remaining debts. Individual debtors who would not qualify for relief under Chapter 7 due to higher monthly income or who would want to avoid Chapter 7 to prevent the liquidation of assets may now qualify as debtors under the SBRA and consequently be able to restructure or discharge their guaranties of business debts through Subchapter V.

As small business debtors under the SBRA, individuals can restructure personal guaranties of business debts without fulfilling the more rigorous requirements of confirming a plan in a typical Chapter 11 case. Among other things, Subchapter V debtors will have the assistance of a Subchapter V trustee, whose role is to promote, and possibly mediate, confirmation of a consensual plan. Additionally, Subchapter V debtors will not need to file a disclosure statement and can delay administrative expense payments. These differences from typical Chapter 11 cases should make it easier for individual Subchapter V debtors to successfully confirm their bankruptcy plans and, in turn, be able to restructure or discharge their personal guaranties of business debts.

Perhaps the most significant aspect of Subchapter V bankruptcy cases is the quick pace at which they progress. While creditors may better be able to take their time considering their options in a typical Chapter 11 case for an individual debtor, creditors must be alert right from the beginning of a Subchapter V case. Bankruptcy courts will hold a status conference in Subchapter V cases within 60 days, and sometimes sooner, of the date the case was filed. Additionally, the debtor must file its plan within 90 days of the date the Subchapter V bankruptcy case was filed. Accordingly, creditors should begin reviewing their files, monitoring the bankruptcy case, and developing a case strategy very shortly after receiving notice of a Subchapter V case to prevent missing these quick deadlines and important filings.