Congress May Consider Making $7.5 Million Debt Limit for Subchapter V Permanent: Should the Limit Be Increased?

March 3, 2022Herrick Restructuring Review

The Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.

The introduction in 2020 of subchapter V for small business chapter 11 cases was the biggest structural reform in business bankruptcies since the enactment of the Bankruptcy Code in 1978. Subchapter V was enacted in 2019 as part of the Small Business Reorganization Act and became effective in February 2020.  It was originally limited to cases with $2,725,625 or less in debt, but when Congress passed the CARES Act in 2020 in response to the COVID pandemic, it increased the subchapter V debt limit to $7.5 million. While that increase was originally scheduled to expire on March 27, 2021, it was extended through March 27, 2022.

Now there appears to be bipartisan support in Washington for making the $7.5 million debt limit permanent. Senator Charles Grassley, a ranking member of the Senate Judiciary Committee, who has had a long interest in reforms of the Bankruptcy Code, has said that he supports a permanent revision in the debt limit.

Before the enactment of subchapter V, there was widespread agreement among lawyers, lenders and bankruptcy judges that chapter 11 had become unwieldy – and too expensive – for small business reorganizations. Subchapter V was designed to address those problems because it:

  • Allows a debtor’s equity holders to retain ownership of the debtor without paying creditors in full and without contributing new value;
  • Eliminates the need to appoint a creditors’ committee unless the court orders otherwise “for cause;”
  • Eliminates the requirement that a debtor file a disclosure statement, instead requiring the debtor to include in its proposed plan of reorganization a brief history of the debtor’s operations, a liquidation analysis, and projections regarding the debtor’s ability to make its plan payments;
  • Provides for the appointment of a subchapter V trustee to help develop a plan of reorganization;
  • Gives the debtor the exclusive right to file a plan of reorganization, but the debtor is required to file a plan within 90 days of the commencement of the case, which is intended to speed the process;
  • Allows the debtor to modify non-purchase-money debt incurred primarily in connection with the debtor’s small business that is secured by an interest in the debtor’s principal residence;
  • Allows the debtor to confirm a plan even without any creditor support; and
  • Eliminates quarterly United States Trustee fees.

Based on the number of subchapter V cases filed, the new law has been a success. According to statistics compiled by the Department of Justice, there have been approximately 2,900 subchapter V cases filed since early 2020. That number stands in stark contrast to the small number of traditional chapter 11 cases, which have been at record low levels. According to statistics published by the ABL Advisor, business chapter 11 filings in January 2022, totaled 223, a 53% drop from the 479 business chapter 11 filings in January 2021.

Subchapter V appears to have been a well-designed and successful experiment. Its provisions were carefully crafted to tackle well-known problems that chapter 11 posed for small business. And the number of subchapter V case filings demonstrates that it clearly filled a need. In light of that successful – albeit brief – history, it’s worth asking whether the debt limits should be further increased. A business with $7.5 million in debt is still a very small business measured by the standards of the US economy. And a business with debt just above those limits will still find a traditional chapter 11 case lengthy and expensive. Increasing the debt limit would make subchapter V available to a much larger universe of troubled businesses. Given that history, Congress may want to go beyond making the $7.5 million debt limit permanent and even consider increasing the debt limit, if only on a temporary basis to see if the increased limits provide the same benefits to small businesses seeking to reorganize without unfairly harming the interests of their creditors.

For more information on this alert or other restructuring & finance litigation matters please contact:

Stephen B. Selbst at +1 212 592 1405 or [email protected]

© 2022 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.