Can Small Business Owners Modify Their Mortgage Under Subchapter V?

When you started your business, you likely envisioned a future of exponential success and unlimited expansion. You might have hoped you could use the passive income for your retirement, especially in light of the current state of pensions in the U.S.

However, many small business owners with these dreams are currently struggling to stay afloat due to massive levels of debt. If you are researching options that could provide financial relief, you might have already looked into Chapter 11 Bankruptcy. Historically, business owners have had trouble with this route because of the cost of filing and the requirement to obtain approval from creditors. A recent change to U.S. Bankruptcy Code, however, may address these issues, and small business owners throughout the country may begin to see it as a viable option.

On August 23rd, Congress passed the Small Business Reorganization Act of 2019, which adds Subchapter V to Chapter 11 Bankruptcy. This, in theory, will improve debt reorganization processes for small business owners who owe $2,725,625 or less.

Effective in February of 2020, Subchapter V:

  • Requires small business debtors to file their reorganization plan within 90 days of filing the bankruptcy petition
  • Requires the appointment of a “standing trustee” to oversee the case
  • Allows the debtor to modify (i.e. cram-down) their mortgage, as long as their residence was used in connection with their business
  • Does not form or involve a creditors’ committee
  • Does not require approval of the debtor’s plan from creditors, as long as the plan outlines the use of all disposable income to repay debt in 3-5 years

Generally, this process will be less expensive and more efficient than the current process of filing for bankruptcy under Chapter 11. As with Chapter 12 and 13, the debtor creates the reorganization plan with the help of the designated trustee.

Many small business owners are keen to find out whether they will be able to adjust their mortgages under Subchapter V. While the mortgage can be for the debtor’s principal residence, the underlying loan must have been secured in connection with the business, rather than for the purpose of acquiring the residence. While Subchapter V may experience adjustments as more business owners file for bankruptcy, debtors across the country are hoping this code will serve as a path to a thriving business and secure financial future.

Get in Touch with Our Firm for Personalized Counsel

Internet research is a good first step, but it could never fully replace the support you will gain from a qualified legal professional. At the Law Office of Robert W. Kovacs, Jr., we provide Worcester individuals, families, and business owners with fully-personalized counsel and representation as they assess their options and file for bankruptcy. Every step of the way, we will answer your questions and closely evaluate your situation in order to provide the best possible recommendations.

For the dedicated and knowledgeable support you deserve, schedule your initial consultation or call our firm at (508) 645-4073 today.