Congress Extends Higher Debt Ceiling for Small Business Bankruptcies

We previously informed you that if you are a small business that needed to file bankruptcy to save your company, then you may be able to take advantage of Subchapter V of Chapter 11 of the Bankruptcy Code. 

The new subsection, which took effect in February 2020, creates a more streamlined and less expensive Chapter 11 reorganization path for small business debtors.  Under the law as originally passed, to be eligible for Subchapter V, a debtor (whether an entity or an individual) had to be engaged in commercial activity, and its total debts -- secured and unsecured – must be less than $2,725,625.  At least half of those debts must have come from business activity. 

In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which raised the Subchapter V debt ceiling for one year to $7,500,000.  The higher debt ceiling was scheduled to expire on March 27, 2021.  Late last week, the United States House of Representatives passed the Senate-amended version of H.R. 1651, the “COVID-19 Bankruptcy Relief Extension Act of 2021,” to extend the $7,500,000 debt ceiling through March 2022.  President Biden signed the measure into law over the weekend.

Subchapter V has proven popular, with over 1,400 cases filed in the last year.  Approximately 1/3 of those cases could not have proceeded under Subchapter V but for the higher debt limits.  The American Bankruptcy Institute reports that Subchapter V cases are experiencing higher plan-confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11.