Congress Moves Towards Retaining COVID-19 Era Subchapter V Debt Ceiling
On August 23, 2019, the Small Business Reorganization Act (SBRA) was signed into law, establishing Subchapter V of the Bankruptcy Code.
05.03.24
Subchapter V provided a streamlined path for reorganization applicable to small businesses with debt of $2.7 million or less. In response to the COVID-19 pandemic, the debt limit was raised to $7.5 million.[1] However, this debt ceiling was set to revert back to $2.7 million on March 27, 2021.
The $7.5 million debt ceiling has been extended twice, with the current extension set to expire on June 21, 2024.[2] A bipartisan group in the U.S. Senate introduced a bill on April 17, 2024, that would extend the $7.5 million debt limit through 2026.[3] This bill comes on the heels of the American Bankruptcy Institute’s yearlong study of Subchapter V, which found that Subchapter V cases are confirmed faster, more often and at a lower cost than a standard Chapter 11 case.[4] Additionally, Subchapter V cases have approximately twice the confirmation rate and half the dismissal rate of non-Subchapter V small business cases.[5] They are also much faster—the median time to confirmation for a Subchapter V case is 6.4 months, compared to 10.3 months for a non-Subchapter V small business case.[6]
Subchapter V cases generally allow small businesses to reorganize faster and at a lower cost than non-Subchapter V cases. These efficiencies result from some significant differences from non-Subchapter V cases, namely:
- Subchapter V cases generally do not have a creditors’ committee.
- Subchapter V debtors are not required to pay fees to the U.S. Trustee.
- A Subchapter V trustee is appointed and charged with assisting in developing a consensual plan of reorganization, without removing the debtor from controlling its business.
- A separate disclosure statement is generally not required.
- The debtor retains an exclusive non-terminable right to file a plan of reorganization.
- Subchapter V allows for the confirmation of a plan of reorganization even if all classes vote to reject the plan.
- Subchapter V allows the debtor to pay administrative expenses over time, under a confirmed plan of reorganization.
- Subchapter V does not apply the absolute priority rule, thus allowing equity holders to retain their interests even when creditors are not paid in full.
The proposed extension of the debt limit would allow additional small businesses, many of whom for which a traditional Chapter 11 would not be financially feasible, to take advantage of the provisions of Subchapter V.
Co-authors Michael Yurkewicz, partner, and Benjamin Fischer, associate, are members of the Bankruptcy & Restructuring Department at Klehr Harrison.
[1] The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (2020).
[2] Bankruptcy Threshold Adjustment and Technical Corrections Act, Pub. L. No. 117-151, 136 Stat. 1298 (2022).
[3] Bankruptcy Threshold Adjustment Extension Act, S. 4150, 118th Cong. (2024).
[4] Amer. Bankr. Inst., Subchapter V Task Force Final Report (2024), available at https://subvtaskforce.abi.org/.
[5] U.S. Trustee Program, Chapter 11 Subchapter V Statistical Summary Through February 29, 2024, available at https://www.justice.gov/ust/page/file/1499276/dl?inline.
[6] Id.