Companies Stretch Limits of Small Business Bankruptcy Eligibility

Bankrupt companies are testing the boundaries of a relatively new form of Chapter 11 filing formed to streamline restructuring for small businesses, spotlighting the law’s loopholes on who’s eligible for it.

Debtors filing bankruptcy under Subchapter V of the bankruptcy code, enacted by Congress in February 2020, get access to certain benefits not available in an ordinary Chapter 11. Those include debtors’ being able to keep equity and not having to deal with official creditor committees.

The attractive features intended to streamline restructuring for small business owners have led to bigger companies exploiting loopholes, such as using subsidiaries to get ...