$7.5 Million Increased Debt Limit For Small Business Debtors May Become Permanent

Kelley Drye Client Advisory

The law that temporarily increased the maximum amount of debt a company may have to qualify as a small business under Subchapter V – the cheaper, easier, and faster version of Chapter 11 – from $2.7 million to $7.5 million, is about to expire.  A bill introduced in the Senate this week by a bipartisan group of senators led by Senator Chuck Grassley (R-Iowa), however, would make the $7.5 million debt limit permanent.

Bankruptcy professionals have been anxiously waiting to see whether Congress will again come together to continue allowing more small businesses to elect Subchapter V treatment.  A similar bipartisan effort at the end of last year to extend other bankruptcy protections instituted under the Consolidated Appropriations Act failed and, as a result, those protections expired on December 27, 2021.  If the bill proposed this week does not pass by March 27, 2022, the debt limit would revert back to $2,725,625, then it would increase to $3,024,725 on April 1, 2022 per the adjustments recently announced by the Judicial Conference of the United States.

Even if the bill passes, some members of the bankruptcy bar argue that more changes are needed to prevent large companies and private equity funds from taking advantage of Subchapter V to circumvent the safeguards Chapter 11 provides to creditors.  Our experience with Subchapter V  suggests that, even more than in Chapter 11 cases, creditors need to be actively involved as soon as possible for a number of reasons, including the lack of oversight by a creditors’ committee, limited role of the Subchapter V trustee, expedited plan timeline, and ability of equity holders to maintain their interests in certain circumstances even if unsecured creditors are not paid in full.

If approved, the Bankruptcy Threshold Adjustment and Technical Corrections Act (S. 3823, 117th Cong. § 2(a) (2022)) would delete the sunset provision from the CARES Act (Pub. L. No. 116-136, § 1113(a), 134 Stat. 281, 310–11 (2020)) and permanently increase the Subchapter V debt limit to $7.5 million.

As background, the Small Business Reorganization Act (“SBRA”) enacted by Congress in 2019 included a new Subchapter V that allowed small Main Street” businesses to restructure under a modified form of Chapter 11.  Subchapter V was intended to address the hurdles to reorganization facing small businesses by relaxing the complex requirements of Chapter 11, reducing costs, and expediting the timing of the bankruptcy process.  To qualify as a small business under Subchapter V, a company must show that, among other things, its aggregate noncontingent liquidated secured and unsecured debts” do not exceed the limit set by the statute when the bankruptcy petition is filed.  11 U.S.C. § 1182(1)(A).  When the SBRA went into effect on February 19, 2020, the limit was $2,725,625.  In the early days of the COVID-19 pandemic, Congress passed the CARES Act, which temporarily raised the debt limit to $7.5 million through March 27, 2021.  In March 2021, the COVID–19 Bankruptcy Relief Extension Act extended the expiration of the $7.5 million debt limit to March 27, 2022.