Preoccupied Congress Fails to Act, Sending Debt Limit Back Down to $2.7 Million and Reducing Availability of Subchapter V Protection for Small Businesses

Kelley Drye Client Advisory

For now, the Subchapter V debt limit is back down to $2.7 million.  Overshadowed by the contentious confirmation hearings for historic Supreme Court nominee Ketanji Brown Jackson, the Senate Judiciary Committee failed to act on proposed legislation that would have made permanent the increased $7.5 million debt limit and allowed more small businesses to file for bankruptcy protection under Subchapter V of Chapter 11.  Because of this congressional inaction, the legislation that temporarily increased the debt limit to $7.5 million expired on March 27, 2022.

While bankruptcy professionals await news about whether Congress will act, the delay will have real-world consequences for small businesses with non-insider debt between $2.7 million and $7.5 million, which no longer have the right to seek protection under Subchapter V – the easier, cheaper, and faster version of Chapter 11 with the goal of helping them successfully reorganize.

If approved, the Bankruptcy Threshold Adjustment and Technical Corrections Act (S.3823, 117th Cong. § 2(a) (2022)) would have eliminated the sunset provision from the CARES Act (Pub. L. No. 116-136, § 1113(a), 134 Stat. 281, 310–11 (2020)) and permanently increased the Subchapter V debt limit to $7.5 million.  Even without S.3823, the debt limit will automatically increase to $3,024,725 on April 1, 2022 per the routine adjustments recently announced by the Judicial Conference of the United States.  Adjustment of Certain Dollar Amounts in the Bankruptcy Code, 87 Fed. Reg. 24, 6625 (February 4, 2022).

The Senate Judiciary Committee does not currently have a hearing scheduled to consider S.3823, but Congress may still increase the debt limit by enacting a modified version of the bill.  We will continue to monitor and provide updates on Kelley Drye’s Bankruptcy Law Insights Blog.

Even if a modified version of the bill passes, some 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 interests in reorganized debtors even if unsecured creditors are not paid in full.

Please see our prior post on this subject, $7.5 Million Increased Debt Limit For Small Business Debtors May Become Permanent, for background on Subchapter V and the Small Business Reorganization Act.