Congress Considers Another Extension to the Subchapter V $7.5 Million Debt Limit

On February 19, 2020, Congress enacted the Small Business Reorganization Act (“SBRA”) to, among other things, streamline the chapter 11 bankruptcy process for a small business by creating subchapter V of the Bankruptcy Code. Under the SBRA, a “small business” was one with less than $2,725,625 in debt. Few businesses, however, were eligible to take advantage of these new provisions because their debts exceeded the cap.

In the wake of the financial crisis brought on by the Covid-19 pandemic, the debt limit was increased to $7,500,000 as part of the CARES Act. The debt limit’s increase dramatically increased the number of businesses eligible for subchapter V, but it was only temporary. Initially set to expire on March 27, 2021, it was extended to March 27, 2022, when President Biden signed the COVID-19 Bankruptcy Relief Extension Act of 2021. For just under three months, the debt limit reverted to the original amount, temporarily depriving entities with debts between $2,725,625 and $7,500,000 from filing under the SBRA. On June 21, 2022, President Biden signed the 2022 Bankruptcy Threshold Adjustment and Technical Corrections Act into law. The bill extended the $7.5 million debt limit to June 20, 2024, and applied retroactively to include cases filed between March 28, 2022 and June 21, 2022.

The increased debt limit is about to expire once again. On April 17, 2024, the bi-partisan 2024 Bankruptcy Threshold Adjustment and Technical Corrections Act (S. 4150) was introduced in the Senate to extend the $7.5 million debt limit for another two years. According to a recent American Bankruptcy Institute report, since the enactment of SBRA, over 25% of all chapter 11 filings have been subchapter V filings. That number may be significantly understated after eliminating the filings of large corporate debtors, which often include separate petitions for each subsidiary. For example, the chapter 11 filings of Peterson Health Care, WeWork, and Regus each involved over 100 bankruptcy petitions.

While a permanent extension is preferable (as recommended by the ABI Task Force), ideally Congress will pass the 2024 Bankruptcy Threshold Adjustment and Technical Corrections Act before June 21, 2024 and avoid the disruption that occurred in 2022.

For more information on subchapter V bankruptcy cases, see here:

• Subchapter V Trustee Fees Protected as Administrative Expenses Outside the Ordinary Course of Business
• Commercial Real Estate Disputes in Subchapter V Chapter 11 Cases: Landlord and Tenant Rights in Bankruptcy Proceedings
• Recent Developments in Subchapter V of Chapter 11 of the Bankruptcy Code
• Increase in Subchapter V Debt Limit Extended for Two Years 
• Bankruptcies on the Rise and Subchapter V Debt Limit Increase Poised to be Made Permanent