On June 21, 2022, President Joe Biden signed into law the “Bankruptcy Threshold Adjustment and Technical Corrections Act”. The Act restores the increase of the debt limit for small businesses filing for bankruptcy under subchapter V of chapter 11 from $2,725,625 to $7,500,000.
The increased debt limit, set to expire on June 21, 2024, unless extended, will ensure that more small businesses are able to take advantage of the streamlined, and less expensive, subchapter V process.
The Small Business Reorganization Act of 2019 (SBRA) added subchapter V to chapter 11 of the Bankruptcy Code, and originally set the debt limit at $2,725,625. Prior to the enactment of SBRA, most of rules in chapter 11 applied across the board to all businesses, from General Motors to “mom and pop” shops. The debt limit was temporarily increased to $7,500,000, but the increase expired in March 2022 and reverted to $2,725,625.
Subchapter V permits a small business owner to file a plan that retains his or her ownership stake in the business, without having to obtain an impaired consenting class of non-insider creditors under its plan, provided that the plan is fair and equitable and does not discriminate unfairly. For a plan to be fair and equitable, a small business must commit its projected, disposable income toward a repayment plan for a minimum of three to five years.
According to the American Bankruptcy Institute, more than 3,000 debtors have elected to file under subchapter V of chapter 11 since the enactment of SBRA. As the country encounters increased economic headwinds, more small businesses may seek bankruptcy relief under subchapter V.
About the author:
Jason W. Bank is the chair of the firm’s Bankruptcy and Restructuring Practice Group. He focuses his practice in the areas of commercial bankruptcy, out-of-court workouts, corporate restructuring and creditors’ rights. Jason has successfully guided numerous businesses through out-of-court restructurings and Chapter 11 reorganizations. He has negotiated resolutions of complex financial issues and debtor-creditor disputes and achieved consensual restructurings while avoiding bankruptcy or litigation.
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