What is the "middle market"? Typically, this segment of the U.S. economy is defined as businesses with annual revenues roughly in the range of $10 million to $1 billion. Collectively, they are an economic powerhouse: According to the National Center for the Middle Market, there are about 200,000 such businesses in the United States, with annual combined revenues exceeding $10 trillion. Of course, these businesses—larger than the typical "mom and pop" shop, but most still privately owned or closely held—are not immune from financial distress, whether COVID-19-19-induced or otherwise, and at some point in the corporate life cycle may need to undergo financial restructurings, loan workouts, or bankruptcy proceedings. Unfortunately, the middle market has been particularly hard-hit by the rising costs of Chapter 11 bankruptcy in recent years, to the point that for some companies, it has paradoxically become too expensive to go bankrupt.

In response to broad criticism that Chapter 11 had become too expensive and complex for all but the largest companies, Congress enacted the Small Business Reorganization Act of 2019 (SBRA), which went into effect in February 2020. The SBRA added "Subchapter V," 11 U.S.C. §§1181-95, to Chapter 11 of the Bankruptcy Code. Despite its formal name—the Small Business Reorganization Act—the statute colloquially known as "Subchapter V" may offer a streamlined reorganization vehicle for some middle market companies.

Subchapter V Benefits

Subchapter V was intended to provide eligible debtors with a more efficient, less costly, and simpler path to a Chapter 11 restructuring. Among its key features, Subchapter V (1) eliminates the official committee of unsecured creditors; (2) eliminates a debtor's obligation to pay quarterly U.S. Trustee fees; (3) provides a reduced period (90 days) for the debtor (but no other party) to file a Chapter 11 plan; (4) permits a debtor to spread the payment of administrative expenses (including its attorneys' fees and that of the Subchapter V trustee) over the life of its plan—which can stretch up to five years following plan confirmation—as opposed to having all administrative expenses due at confirmation; and (5) relaxes the "absolute priority rule," which allows a debtor's equity holders to retain their ownership interests in the debtor without an infusion of new capital or the payment of all creditors in full. Subchapter V also permits a debtor to confirm a plan of reorganization without accepting votes, because the debtor can "cramdown" a plan on all creditors without the approval of an impaired, consenting class of creditors. See 11 U.S.C. §1191(b).