Global Pandemic: Subchapter V Debt-Eligibility Limits Extended Beyond One Year

The recently enacted COVID-19 Bankruptcy Relief Extension Act extends the $7.5 million debt-eligibility limit for small businesses seeking to utilize subchapter V of chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) for an additional year, through March 27, 2022. The Extension Act will allow more businesses to take advantage of the protections afforded by Subchapter V, which may be critically important to small businesses seeking to recover from the effects of the global pandemic.

The SBRA and Subchapter V

In 2019, recognizing that the requirements of Chapter 11 often made reorganizing a business through a formal bankruptcy proceeding an ineffective tool for many small business debtors, Congress enacted the Small Business Reorganization Act of 2019 (SBRA). The SBRA added Subchapter V, which modifies the Chapter 11 proceedings, but only for qualified small businesses. As originally drafted, eligibility to proceed under Subchapter V was limited to those small businesses with noncontingent liquidated debts of no more than $2,725,625.

Congress intended for a Subchapter V proceeding to be less costly, faster and more advantageous for small businesses than a typical corporate Chapter 11 proceeding. Among other things, most Subchapter V proceedings eliminate the statutory committee of unsecured creditors and replace it with a more efficient Subchapter V trustee. The trustee does not operate the debtor’s business, but supervises the Chapter 11 process, makes recommendations to the court and assists the debtor to confirm a plan. Subchapter V also streamlines the plan confirmation process, requiring the debtor to file a plan within 90 days and eliminating the need for the debtor to prepare and gain approval of a lengthy disclosure statement. Moreover, Subchapter V provides for small business owners to receive a discharge and retain ownership of their business without paying all unsecured claims in full, provided that the net income from the business is used to pay creditor claims for a period of three to five years.

The CARES Act: Increased Subchapter V Debt-Eligibility Limits

The SBRA went into effect on February 19, 2020. One month later, every state in the U.S. had declared a state of emergency in response to the COVID-19 pandemic. As stay-at-home orders became common and small businesses struggled to stay afloat with fewer customers, Congress quickly bolstered Subchapter V with the “Coronavirus Aid, Relief, and Economic Security Act” (the “CARES Act”; P.L. 116-136), increasing the debt-eligibility limit from $2,725,625 to $7,500,000. The CARES Act, however, was not designed to last more than a year; and the Subchapter V $7.5 million debt-eligibility limit was set to sunset on March 27, 2021.

Most commentators agree that the increase of the Subchapter V debt-eligibility limit made small business reorganization feasible at the time when it was needed most. In the short span of a year, proceedings under Subchapter V boasted higher confirmation rates, speedier confirmations and more consensual plans than other corporate Chapter 11 proceedings. Since February 19, 2020, more than 1,700 Subchapter V cases have been filed, with a majority of cases filed in the Fifth, Ninth and Eleventh Circuits. The relative frequency of Subchapter V to standard Chapter 11 proceedings is on the rise: between August and November of 2020, Subchapter V cases increased by 20% and, over the past year, bankruptcy judges have released more than 150 opinions analyzing the 15 new sections of Subchapter V.

With many businesses still experiencing partial or full shutdowns and the impact of the global pandemic on small businesses not yet fully realized, the Extension Act will likely continue the trend of small business reorganizing through Subchapter V proceedings.

For More Information

If you have any questions regarding Subchapter V proceedings, the SBRA, corporate bankruptcy or other corporate reorganization issues, please reach out to the professionals in Faegre Drinker’s Finance and Restructuring Group.