Subchapter V (New Bankruptcy law subchapter) and Who May be a Debtor?

Subchapter V (New Bankruptcy law subchapter) and Who May be a Debtor?

In re Charles Christopher Wright, Case No. 20-01035-HB (Bankr. D.S.C. April 27, 2020), the Bankruptcy Court in South Carolina addressed the issue of who may be a “debtor” under new bankruptcy law Subchapter V (the new fast track bankruptcy chapter for small businesses).

The issue before the Court was whether business debt without an ongoing business was sufficient to meet the requirement of engaging in commercial or business activities under Subchapter V of the Bankruptcy Code.

The Debtor, Mr Wright, was an individual involved in two previous Chapter 11 business bankruptcy filings and as a result he retained personal liability for significant business debts. At the time of Mr. Wright’s personal bankruptcy filing, both of his business entities had stopped doing business . Mr. Wright’s bankruptcy petition listed business debt of more than $395,816.29 and consumer debt of $220,882.42. The United States Trustee assigned to the case argued that since the businesses were not active, Mr. Wright did not qualify to be a debtor under Subchapter V.

The Bank Code, Section 11 U.S. Code § 1182(1), defines a “debtor”(for purposes of Subchapter V) as a person engaged in commercial or business activities that has aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount not more than $7,500,000 of which not less than 50 percent arose from the commercial or business activities of the debtor.

Mr. Wright clearly met the requirement under Subchapter V because more than 50% of his total debt was business or commercial debt.

The issue before the Court was whether the Debtor met the requirement of being “engaged in commercial or business activities” despite the fact that both businesses had closed prior to his personal bankruptcy filing.

The Bankruptcy Court held that the business activity requirement had been met and allowed the case to proceed under Subchapter V. The Judge held that Subchapter V is not restricted to a person who, at the time of filing of the petition, is presently engaged in commercial or business activities and who expects to continue in those same activities under a plan of reorganization.

Bankruptcy Courts are courts of equity and the goal of bankruptcy is to help individuals and businesses reduce, reorganize or eliminate their debt.

The view expressed by the Wright Court will encourage more individuals and businesses to file under new Subchapter V.

This ruling could also assist businesses that have closed as a result of the corona virus and have not reopened, but want to reorganize.

Individuals or businesses who are considering a small business bankruptcy filing under Subchapter 5 and have questions should contact James Shenwick (212) 541-6224; jshenwick@gmail.com.