Subchapter V: Providing Hope To Formerly Successful Entrepreneurs

The Bankruptcy Code’s Subchapter V provides hope to formerly successful entrepreneurs. It’s a hope that never before existed.

I’ll try to explain.

Formerly Successful Entrepreneurs – A Historical Problem

The Bankruptcy Code became effective in October of 1979. And I’ve been practicing under the Bankruptcy Code from the beginning: licensed in 1980.

Here’s an observation that’s been true throughout my career, until enactment of Subchapter V:

Congress really, really, really does not like formerly successful entrepreneurs.

Congress loves small businesses. Members of Congress love to:

But in an ironic twist, all that changes when a business fails.

Here’s the irony:

entrepreneurship is risky business;
every entrepreneur, no matter how successful, will face moments of crisis when the very existence of the business is in danger;
a high percentage of businesses fail;
financial failure is a common thing for small businesses–even when run by the gifted with high work ethic; but
until enacting Subchapter V, Congress has abhorred the very idea of providing down-side protection to formerly successful entrepreneurs.

Think about it.

Here’s an illustration of the pre-Subchapter V problem:

Client is an individual who owns a Main Street business that has been growing and prospering for at least a decade;
Every year, as a matter of course, Client increases financing levels to meet the needs of the growing business and signs personal guarantees;
Then, the economy turns . . . or Client’s product becomes obsolete . . . or another type of tragedy happens, resulting in Client’s business failing, and a liquidation leaves huge deficiency claims against Client, along with large pass-through tax liabilities; and
Now, Client owes business debts that can never be repaid from Client’s current assets or future earnings.

So . . . where is Client supposed to turn for bankruptcy relief? The unhappy and ineffectual choices include:

Chapter 7. Client (like most successful entrepreneurs) had been living a comfortable, but not lavish, lifestyle and would like to retain the essential living assets . . . to support life now and into old age. Rarely can such goals be accomplished in Chapter 7.
Chapter 13. The debt load of a formerly successful entrepreneur is, typically, far-beyond eligibility debt limits for Chapter 13—so, Chapter 13 is not a option.
Chapter 12. This only works for farmers, and Client is not a farmer.
Regular Chapter 11. The absolute priority rule is . . . well, it is absolute in most circuits. There are some work-around possibilities—but those are tricky and risky and can be hard to pull off.

The pre-Subchapter V conclusion is this: No viable bankruptcy solution exists for Client.

But Congress changes all that by enacting Subchapter V.

The result is this: Subchapter V can provide hope for formerly successful entrepreneurs and their businesses.

And that’s a hope that never existed before.

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