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From Dusk ‘Til Dawn: Hope for the Subchapter V Debt Limitation

The Small Business Reorganization Act (SBRA), which was signed into law on August 23, 2019, and went into effect as of February 19, 2020, put in place what is commonly known as “Subchapter V” in the reorganization industry. Under the SBRA, a qualified “small business debtor” may elect to be treated as a Subchapter V debtor if, among other things, the debtor’s aggregate, noncontingent, liquidated secured and unsecured debts as of the petition date totaled no more than $2,725,625. Qualification as a Subchapter V debtor would ostensibly make the chapter 11 process more accessible, economical, and beneficial for small business debtors making the election, because the SBRA was designed for smaller business that otherwise cannot afford the administrative fees and other costs associated with traditional Chapter 11 cases (even traditional small business Chapter 11s). 

The spread of COVID-19 in Spring of 2020, however, caused Congress to change the debt limitation. As part of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), Congress temporarily increased the $2,725,625 debt limit to $7,500,000. That increase allowed more debtors to qualify and elect treatment under the Subchapter V provisions. However, the CARES Act provided that the debt limitation would automatically revert back to $2,725,625 on March 27, 2021. Under the COVID-19 Bankruptcy Relief Act of 2021, Congress extended that reversion date to March 27, 2022.

It was unclear during the months leading up to the March 27, 2022 expiration of the increased debt limit whether Congress would act to further extend the expiration date. Indeed, the country appears to have turned a corner in regards to hospitalizations due to COVID-19, and the economy for much of the country was for all intents and purposes fully “open” and beyond the economic devastation caused by the temporary shutdowns in 2020 and 2021. For instance, as of March 30, 2022, the Centers for Disease Control and Prevention removed its “Cruise Ship Travel Health Notice” that recommended against traveling on cruise ships, signaling a positive turn for one of the industries arguably most impacted by COVID-19.

Congress ultimately failed to extend the March 27, 2022 deadline. Perhaps this was due to COVID-19 receding from the headlines. After all, according to a Quinnipiac University Poll released on March 30, 2022, COVID-19 now ranks behind, among other issues, inflation, the Russia-Ukraine invasion, immigration, climate change, election laws, and crime as the most urgent issues in the United States. See here. Furthermore, the mid-term elections are just around the corner. One thing is certain – it is an uncertain political and economic environment in which no one can predict exactly what Washington D.C. will do.

A permanent increase in the Subchapter V debt limit may, however, be forthcoming. On March 14, 2022, Senators Durbin (D-IL), Whitehouse (D-RI), Cornyn (R-TX), and Grassley (R-IA), introduced the Bankruptcy Threshold Adjustment and Technical Corrections Act (S. 3823, 117th Cong.), which seeks, among other things, to permanently increase the Subchapter V debt limit to $7,500,000. Although the bill has not made its way through the entire legislative process before the sunset of the increased debt limit, the Senate passed amended S. 3823 by unanimous consent on April 7, 2022. The House received the bill on April 11, 2022. See here.

But, what does this mean for now? It means that debtors who would otherwise qualify under Subchapter V prior to March 27, 2022, will no longer qualify because they will exceed the debt limitation now in play (which automatically increased pursuant to the SBRA to $3,024,725 on April 1, 2022). Notwithstanding this minimal increase, the sunset of the increased debt limit arguably is not good news for legitimate small business debtors whose financial problems may be attributed to COVID-19 (for example, supply-side shortages and labor shortages) or who may now be facing increased financial pressure due to inflation.

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume XII, Number 105
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About this Author

Justin Cloyd Cincinnati Ohio Associate Attorney Restructuring Bankruptcy Law Squire Patton Boggs
Associate

Justin Cloyd is a member of the Restructuring & Insolvency Practice Group.

Prior to joining the firm, Justin clerked for Bankruptcy Judge Edward L. Morris and Magistrate Judge Candace Smith. There, he immersed himself in the intricacies of various court-made and legislative laws, most relevantly the US Bankruptcy Code and the Federal Rules of Civil Procedure. As a law clerk, Justin was involved in more than 100 cases concerning consumer and corporate debt restructuring, including complex chapter 11 filings. He also aided in the adjudication...

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