The Small Business Reorganization Act, commonly referred to as “Subchapter V,” is a streamlined, flexible process for small businesses to reorganize in bankruptcy. Subchapter V is a type of Chapter 11 case designed for debtors (an entity or individual) engaged in business where at least half their total debt is business related. Less procedurally complex than a traditional Chapter 11 case, a typical subchapter V case is quicker, less expensive, more debtor-friendly and more efficient. As part of the CARES Act, the debt limit for Subchapter V eligibility had been temporarily increased from its original amount of $2,725,625 to $7,500,000 to help small businesses through unprecedented times. That provision expired on March 27, 2022.
With bipartisan support, on June 21, 2022, the Bankruptcy Threshold Adjustment and Technical Corrections Act was signed into law by President Biden. The Act once again increases the total debt threshold (as defined in the Act) for determining the eligibility of a debtor to proceed under Subchapter V to $7,500,000, effective retroactively to cases commenced on or after March 27, 2020, through June 21, 2024 (two years after the date of enactment of the Act).
This extension of the higher debt limit in subchapter V cases will help address post-pandemic issues, such as the end of certain government assistance programs that include eviction and foreclosure moratoriums. As inflation and interest rates continue to rise, more companies and individuals may look to this reorganization option to protect themselves as creditors become more proactive in attempting to recover from their own pandemic losses.
This new law also significantly increases Chapter 13 debt limits for two years, to $2,750,000. Chapter 13 cases are for individuals, not business entities. In addition to raising the debt limit, the Act makes important changes to eligibility under Chapter 13 by changing the definition of an eligible debtor to “an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated debts of less than $2,750,000 or an individual . . . and such individual’s spouse . . . that owe . . . noncontingent, liquidated debts that aggregate less than $2,750,000.” There will no longer be separate debt limits for unsecured and secured debts, but rather one single limit for all debts.
Like the Subchapter V increase, the increased debt limits for Chapter 13 will also sunset in two years. This increase will allow more individuals to reorganize without the need to file a generally more complex and expensive individual Chapter 11 case. Debtors with large mortgage debts will be able to cure defaults and maintain payments. Large judgments, tax liabilities or large deficiencies from foreclosures or repossessions will be less likely to exclude someone from Chapter 13 relief.
With the expanded debt limits, more debtors who would have had no option but to file a traditional Chapter 11 case can choose the more streamlined Subchapter V case. And many debtors will be eligible to file a Chapter 13 who would have been disqualified merely because either their unsecured debts or their secured debts happened to exceed the prior debt limits. These revisions have taken into consideration the economic realities of small businesses and individuals, where owners, for example, have routinely guaranteed significant business debt. Business closures during the pandemic have triggered related liabilities that their owners never contemplated.
Bankruptcy filings remain at historically low levels, but that tide is expected to change. Pandemic-related subsidies are expiring, creditors are becoming more aggressive, and interest rates and inflation are rising. Congress acted, providing better bankruptcy options to address the many scenarios threatening personal and business financial stability.
Carrie Tatkin is a partner at Radix Law, with a practice focused on consumer and business bankruptcy, representing both creditors and debtors. With more than 35 years of legal experience, Tatkin is adept at handling all aspects of her clients’ bankruptcy matters.