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Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

February 24, 2022

Subchapter Five Debt Limit Increases Set to Expire in March

Reorganization under Chapter 11 of the United States Bankruptcy Code is a time-consuming and often a very expensive process. Prior to the February 2020 effective date of Subchapter V – Small Business Debtor Reorganization, the high administrative and transactional costs made a Chapter 11 reorganization out of reach for most small companies in financial distress. Subchapter V of the Bankruptcy Code was meant to address this problem and provides a streamlined, faster and less expensive method for small businesses to reorganize.i When Subchapter V was originally enacted, only businesses with total debts of $2.7 million or less were eligible to use this process. Obviously, only the smallest of businesses could avail themselves of this alternative.

Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted in March 2020, the debt limit was raised to $7.5 million, making this option available to a much broader range of companies. The increased debt limit was intended to be temporary and was scheduled to expire on March 27, 2021. While most parties agreed that the debt limit increase made Subchapter V a much more effective restructuring tool, it wasn’t until March 26, 2021, that a bill extending the deadline was approved by both the House and Senate, resulting in President Biden signing the extension on March 27, 2021—the day the debt limit increase would otherwise have expired. That bill, the COVID-19 Bankruptcy Relief Extension Act of 2021, again extended the $7.5 million debt ceiling for only one year, until March 27, 2022.

Since its effective date, cases filed under Subchapter V have accounted for over 30 percent of all Chapter 11 filings. While data is not available on the number of those debtors that were only eligible due to the increased debt limit, anecdotal evidence demonstrates debtors with over $2.7 million comprise a significant proportion of the total Subchapter V population.

With only approximately one month left before the debt limit reverts to $2.7 million, it is still unclear if Congress and the president will act in time to keep the ceiling at $7.5 million. Absent passage of a bill of that nature, many companies will again be left with a “full” Chapter 11 case as their only option. Due to the additional burdens of a full Chapter 11 filing, that option may provide no relief at all.

Barclay Damon’s Restructuring, Bankruptcy & Creditors’ Rights Practice Area issues alerts on an ongoing basis to keep clients and friends up to date on important developments in the insolvency space. If you have any questions regarding the content of this alert, please contact the author, Jeff Dove, co-chair of the Restructuring, Bankruptcy & Creditors’ Rights Practice Area, at jdove@barclaydamon.com; Janice Grubin, co-chair of the Restructuring, Bankruptcy & Creditors’ Rights Practice Area, at jgrubin@barclaydamon.com; Robert Wonneberger, partner, at rwonneberger@barclaydamon.com; or Frank Heller, partner, at fheller@barclaydamon.com.

                                                                    

i The streamlined features of filing under Subchapter V include: the elimination of US trustee quarterly fees; the elimination of the appointment of a creditors’ committee, except “for cause”; a plan document that incorporates disclosure information instead of requiring a separate disclosure statement; the ability to confirm a plan without creditor support; and the ability of a debtor’s owners to retain their equity positions without paying all creditors in full.

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