January 29, 2023

Volume XIII, Number 29

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January 27, 2023

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Congress Temporarily Raises Subchapter V Debt Limit. Again.

A key temporary bankruptcy related response to the pandemic has been re-implemented and extended with the passage of the Bankruptcy Threshold Adjustment and Technical Corrections Act (the “Act”) which extends the increase in the subchapter V debt limit for eligible businesses from $2.7 million to $7.5 million for another two years.

Prior to the pandemic, the Small Business Reorganization Act that created subchapter V contained a maximum debt cutoff for eligibility of $2.7 million. As the COVID-19 pandemic raged, Congress made a significant change to subchapter V in an effort to provide relief to a greater number of businesses, specifically small businesses. As part of the CARES Act passed in 2020, Congress raised the debt limit for subchapter V eligibility from the original $2.7 million to $7.5 million. 

The increased debt limit expired in March. However, on April 7 the Senate passed the Act, followed by the House of Representatives on June 7. The Act now awaits President Biden’s signature, confirming the increased subchapter V debt limit until its expiration two years from its enactment. 

As the pandemic tapers and interest rates rise, more companies may require the protection of chapter 11 to stave off collection efforts by creditors who become more aggressive as the need to collect overdue loans, back rent, and other outstanding obligations becomes more acute and government assistance programs, including eviction and foreclosure moratoriums, expire. In an effort to address this, Congress passed the bipartisan Act, reestablishing the increased debt limit at $7.5 million for small businesses electing to file for bankruptcy under subchapter V, and also raising the debt limit for individuals filing for bankruptcy protection under chapter 13 to $2.75 million.

The increase of the subchapter V debt limit could have significant ramifications for creditors. Increasing the debt limit means that more small businesses will be able to avail themselves of the more debtor-friendly provisions of subchapter V of chapter 11, including the accelerated timeline of the cases and the ability to avoid the absolute priority rule. These, along with other provisions in subchapter V, greatly reduce creditors’ ability to have a say in the chapter 11 proceedings of small businesses and underscore the importance for creditors to become actively involved as quickly as possible to protect their interests.

Perhaps less significant—but still impactful—is the increase in the debt limit for individuals filing for chapter 13 protection. Like the change to subchapter V, the heightened debt limit under chapter 13 lowers the bar for eligibility. With more debtors fitting in under the new chapter 13 debt limit, there is the potential for fewer individual chapter 11 filings, causing creditors to find themselves increasingly involved in chapter 13 cases.

Bankruptcy filings remained at historically low levels during the pandemic and under application of the CARES Act. Thus, increased eligibility alone is not likely to trigger additional case filings. However, increased eligibility coupled with the expiration of COVID-era subsidies and rising interest rates should have an effect. Whatever the future holds, subchapter V and chapter 13 cases can be expected to comprise a larger share of new filings.

Copyright © 2023 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume XII, Number 159
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About this Author

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Will is an associate in the Capital Markets practice group and focuses his practice on bankruptcy and restructuring matters. Prior to joining Womble Bond Dickinson, Will served as a law clerk to the Honorable Joseph N. Callaway in the United States Bankruptcy Court for the Eastern District of North Carolina where he gained valuable experience and insight into bankruptcy litigation and general restructuring issues. 

Will graduated from the University of North Carolina School of Law, where he completed internships with federal courts including the...

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James S. Livermon III Creditor Rights and Bankruptcy Attorney Womble Bond Dickinson Raleigh, NC
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James "Charlie" Livermon is a Chambers-ranked attorney with a robust practice focused on creditors' rights and bankruptcy. A board-certified specialist in business and consumer bankruptcy, he has represented secured and unsecured creditors in Chapter 7, 11, 12 and 13 bankruptcy cases in all bankruptcy districts in North Carolina. He has significant experience in commercial loan workouts, restructurings, receiverships, foreclosures and other pre- and post-judgment remedies, and has defended lenders and creditors in lender liability actions, contract disputes, fraud, misrepresentation and...

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A litigator focused on commercial litigation and creditors' rights, Richard is known for his versatility and ability to handle all aspects of problem loan representation, ranging from complex workouts and restructures to contested litigation and lender liability defense. He regularly represents clients in commercial collections actions, workouts, restructurings, receiverships, bankruptcies, foreclosures and other collateral recovery, and has litigated a variety of business disputes in state and federal court, including matters involving fraud, misrepresentation and...

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Jill Walters Bankruptcy Lawyer Womble Bond Dickinson
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Jill Walters has more than a decade of experience protecting the financial interests of financial institutions, corporate clients of all sizes, and individuals, and guiding these creditor-clients through the bankruptcy and restructuring process. She regularly represents secured and unsecured creditors in bankruptcy cases filed under all chapters of the United States Bankruptcy Code and has experience representing clients of all sizes in adversary proceedings across the country.

Her practice includes lender representation in collection, foreclosure, and claim and delivery actions....

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