A key temporary bankruptcy-related response to the pandemic was reimplemented and extended with the passage of the Bankruptcy Threshold Adjustment and Technical Corrections Act (the “Act”) which extends the Sub-Chapter V debt limit increase for qualifying businesses to $7.5 million for another two years.
Prior to the pandemic, the Small Business Reorganization Act that created Subchapter V contained a maximum debt threshold for eligibility of $2.7 million. As the COVID-19 pandemic raged, Congress made a significant change to Subchapter V in an effort to provide relief to more businesses, especially small businesses. As part of the CARES Act passed in 2020, Congress raised the debt cap for Subchapter V eligibility from $2.7 million to $7.5 million.
The increased debt limit expired in March. However, on April 7, the Senate passed the law, followed by the House of Representatives on June 7. The law now awaits President Biden’s signature, confirming the increased Sub-Chapter V debt limit until it expires two years after it was signed into law.
As the pandemic wanes and interest rates rise, more businesses may need Chapter 11 protection to avoid creditor collection efforts that become more aggressive as the need to collect delinquent loans, rent arrears and other outstanding obligations are becoming more acute and government assistance programs, including moratoriums on evictions and foreclosures, are expiring. In an effort to address this issue, Congress passed the bipartisan law, restoring the increased debt limit to $7.5 million for small businesses choosing to file for bankruptcy under Subchapter V, and also increasing the debt limit for people filing for Chapter 13 bankruptcy protection at $2.75. million.
Raising the Sub-Chapter V debt limit could have significant ramifications for creditors. The increase in the debt limit means that more small businesses will be able to take advantage of the more debtor-friendly provisions of Subchapter V of Chapter 11, including accelerated business sequencing and the ability to avoid absolute priority rule. These, and other Subchapter V provisions, significantly reduce the ability of creditors to have a say in small business Chapter 11 proceedings and underscore the importance of creditors being actively involved. as soon as possible to protect their interests.
The increase in the debt limit for people seeking Chapter 13 protection is perhaps less significant, but still impactful. Like the change to Subchapter V, the increased debt limit under Chapter 13 lowers the eligibility bar. With more debtors registering under the new Chapter 13 debt limit, there is potential for fewer individual Chapter 11 filings, forcing creditors to find themselves increasingly embroiled in Chapter 13 cases.
Bankruptcy filings have remained at historic lows during the pandemic and under the CARES Act. Thus, increased eligibility alone is not likely to trigger additional filings. However, increased eligibility coupled with expiring COVID-era subsidies and rising interest rates should have an effect. Whatever the future holds, it can be expected that Subchapter V and Chapter 13 cases will comprise a greater share of new filings.