April Fools’ Day Brings Relief to Small Businesses and Individuals Filing Bankruptcy

The U.S. Bankruptcy Code will be implementing inflation adjustments in its eligibility and exemption limits by 13.2% across various provisions.

The official adjustments have been published in the Federal Register, marking the first comprehensive update to bankruptcy thresholds since 2022.  A summary of key changes is set forth below.

Small Business Debtors (Subchapter V)

As previously reported, subchapter V of chapter 11 had a debt limit of $7,500,000, but the debt limit reverted to $3,024,725 on June 21, 2024.  The debt limit will now increase to $3,424,000, meaning a business with total debts of less than $3,424,000 may take advantage of the more affordable and efficient subchapter V bankruptcy process, compared to the more costly, traditional chapter 11 process.

Chapter 13 Limits

Chapter 13 is often utilized by small business owners and individuals with assets and income who need financial relief. Chapter 13 is typically much more affordable than a chapter 11 filing. Prior to April 1, only individuals with total unsecured debt of $465,275 and secured debt of $1,395,875 could file for chapter 13. Those dollar limits have increased to $526,700 for unsecured debt and $1,580,125 for secured debt.

Federal Exemptions

Federal exemptions allow a debtor filing for bankruptcy to protect certain assets up a certain dollar value during bankruptcy, meaning that no bankruptcy trustee or creditor may force a sale of an asset if it is exempt.  All federal exemptions will increase, including the following:

• Residence Exemption: Each debtor can now protect up to $31,575 in home equity, which is up from $27,900. A married couple jointly filing may exempt up to $63,150 of property that they own together.
• Motor Vehicle Exemption: The exemption for equity in a vehicle rises to $5,025 from $4,450. (For example, if you own a car valued at $25,000 and a lender has a lien against the car and is owed $20,000, the car is exempt).
• Household goods: The per-item limit for household goods increases to $800 from $700, with an aggregate cap of all household goods and furnishings rising to $16,850 from $14,875.
• Tools of Trade: Work-related tools are now exempt up to $3,175, which is up from $2,800.

Priority Claim Adjustments

Creditors owed certain debts receive priority status in bankruptcy proceedings and may receive payment before general unsecured claims. These limits have increased in key areas as follows:

• Wages and Salaries: Priority status for employee wages owed within 180 days before a bankruptcy filing increase from $15,150 to $17,150.
• Consumer Deposits: Consumers who paid in advance for goods or services can now claim priority status up to $3,800, an increase from $3,350.

Many states offer state-specific exemptions. If you are a debtor planning to file bankruptcy, it is important to consult with an attorney to determine whether state or federal exemptions provide better protection for your assets.

These updated dollar limits apply to all bankruptcy cases filed on or after April 1, 2025. Whether you are an individual seeking debt relief, a small business owner considering reorganization, or a creditor in bankruptcy proceedings, these changes may impact your options. If you have questions about how these new thresholds apply to your specific situation, please contact a Kerr Russell bankruptcy attorney for guidance.