A Day Late and Nearly $5 Million Short?: Legislation Introduced to Make Permanent the $7.5 Million Subchapter V Debt Limit As Temporary Extensions…

On March 14, 2022, Senator Chuck Grassley (R-IA) introduced proposed legislation thatif enactedwould make permanent the $7.5 million debt limit applicable to debtors under subchapter V of chapter 11 of the Bankruptcy Code that has enjoyed only temporary status under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) for the prior two years. Of course, as bankruptcy practitioners may expect, the Bankruptcy Threshold Adjustment and Technical Corrections Act, S. 3823, 117th Cong. (as introduced to the S. Comm. on the Judiciary, Mar. 14, 2022) (the Act) substantially and permanently expands the scope of Subchapter V relief through an inconspicuous cross-reference to previously enacted legislation (the progeny of which is discussed below). Despite the Acts humble language, the proposed change promises a wider swath of small businesses and business owners a faster and more affordable pathway to reorganization in bankruptcy.

On February 19, 2020, the Small Business Reorganization Act (the SBRA) became effective. The brainchild of the American Bankruptcy Institutes (the ABI) Commission to Study the Reform of Chapter 11, the SBRA established subchapter V of the Bankruptcy Code to address the increasingly prohibitive time and cost reorganizations posed to Main Street mom and pop businesses. However, to ensure only small businesses and business operators accessed the truncated procedures of subchapter V, Section 1182(i)(B)(1) of the Bankruptcy Code limited the term debtor for subchapter V purposes to a person engaged in commercial or business activities with aggregate debts not exceeding $2,725,625.

And thenas with any contemporary storycame the COVID chapter. The CARES Act, which was signed into law by President Trump on March 27, 2020, offered sweeping legislative responses to the predicted economic toll the coronavirus pandemic would wreak upon the United States economy. In connection with this focus, the CARES Act provided for a temporary increase in the subchapter V debt limit from $2,725,625 to $7.5 million. The CARES Act debt limit increase was scheduled to sunset one year later, on March 27, 2021, but was extended to March 27, 2022 by the COVID-19 Bankruptcy Relief Extension Act.

The Act simply refers to the Section 1113(a)(5) of the CARES Actthe sunset provisionand provides simply that it is amended by striking paragraph (5). However, this simple legislative modification would nearly triple the debt limit permanently. In a press release, the ABI applauded the Act for increasing the debt limit and noted that, since the enactment of the SBRA, more than 3,000 debtors have elected to file under subchapter V of chapter 11. The Act likewise has found bipartisan supporthaving been introduced with co-sponsorship from Sen. Richard J. Durbin (D-IL), Sen. Sheldon Whitehouse (D-RI), and Sen. John Coryn (R.-TX).

Yet, the timing could have been better. As of the date of this post, the debt limit has reverted to its original limits under the SBRA due to the sunset provisions in the CARES Act and COVID-19 Bankruptcy Relief Extension Act. As the Act winds its way through Congress, the subchapter V practitioners and potential debtors affected by the debt limit reduction will need to watch with bated breath for a permanent solution. Until then, small business debtors whose debt exceeds the $2,725,625 debt limit but is less than the $7.5 million under the Act have a difficult decision to make: whether to wait until the Act passes and is signed into law before commencing a case under subchapter V, or commencing a case under chapter 11 and then seek to convert the case to subchapter V after the Act passes or dismiss the case and refile under subchapter V. This post will be updated if and when the Act is passed by the Senate and signed into law.

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A Day Late and Nearly $5 Million Short?: Legislation Introduced to Make Permanent the $7.5 Million Subchapter V Debt Limit As Temporary Extensions...