United States: Increased debt limit of $7.5 million for small business debtors may become permanent
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The law that temporarily increased the maximum amount of debt a business can have to qualify as a small business under Subchapter V — the cheaper, easier, and faster version of Chapter 11 — by 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 Sen. Chuck Grassley (R-Iowa), however, would make the $7.5 million debt limit permanent.
Bankruptcy professionals are eagerly waiting to see if Congress will reconvene to continue allowing more small businesses to elect Subchapter V treatment. A similar bipartisan effort late last year to extend other bankruptcy protections instituted under the Consolidated Credits Act failed and, therefore, those protections expired on December 27, 2021. If the bill proposed this week is not passed by on March 27, 2022, the debt limit would revert to $2,725,625 and then increase to $3,024,725 on April 1, 2022 in accordance with adjustments recently announced by the United States Judicial Conference.
Even if the bill passes, some members of the bankruptcy bar argue that more changes are needed to prevent large corporations and private equity funds from taking advantage of Subchapter V to circumvent the safeguards that Chapter 11 offers. to creditors. Our experience with Subchapter V suggests that, even more so than in Chapter 11 cases, creditors need to be actively involved as soon as possible for a number of reasons, including lack of oversight by a creditors’ committee, the limited role of the subchapter V trustee, accelerated schedule of the plan, and the ability of equity holders to retain their interests in certain circumstances, even if unsecured creditors are not fully paid.
If approved, the Bankruptcy Threshold Adjustment and Technical Corrections Act (S. 3823, 117th Cong. § 2(a) (2022)) would remove 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 a backdrop, the law on the reorganization of small enterprises (“SBRA“) enacted by Congress in 2019 included a new Subchapter V that allowed “Main Street” small businesses to restructure under a modified form of Chapter 11. Subchapter V was intended to overcome barriers to reorganization that small businesses face by relaxing the complex requirements of Chapter 11, reducing costs and speeding up the timeline of bankruptcy proceedings.To qualify as a small business under Subchapter V, a business must demonstrate that, among other things, its “total non-contingent liquidated secured and unsecured debt” does not exceed the limit set by statute at the time the bankruptcy petition was filed. 11 USC § 1182(1)(A). When the SBRA entered Effective February 19, 2020, the limit was $2,725,625 At the start of the COVID-19 pandemic, Congress passed the CARES Act, which temporarily raised the debt limit to $7.5 million. ars until March 27, 2021. In March 2021, the COVID-19 Bankruptcy Relief Extension Act extended the expiration of the debt limit by $7.5 million. to March 27, 2022.
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