Bankruptcy Update: The COVID-19 Bankruptcy Relief Act of 2021

Dunlap Bennett & Ludwig PLLC

On March 27, 2021, President Biden signed the COVID-19 Bankruptcy Relief Extension Act (the “Extension Act”) into law as Pub.L. 117-5. In relevant part, it extends by a year increased debt limits for small businesses and individuals who want to take advantage of filing bankruptcy under Subchapter V of Chapter 11.

Subchapter V became law pursuant to the Small Business Reorganization Act of 2019. Subchapter V provides eligible debtors, both small businesses and individuals, with a much more debtor-friendly path through Chapter 11 bankruptcy. Some of those benefits include (a) not having a committee of unsecured creditors appointed (except for cause, after notice and a hearing) whose attorney’s fees would be paid by the debtor’s estate, (b) 90 days from the petition date for the debtor to file a plan, (c) elimination of the ability of other parties to file a competing plan, (d) a much easier road to confirmation of a Chapter 11 plan with elimination of the absolute priority rule and the Court’s ability to confirm a plan even over the objection of all creditors, (e) elimination of the need to file a disclosure statement, (f) the appointment of a Subchapter V trustee whose fees are relatively minimal and whose main purpose is to facilitate the acceptance of a consensual plan by all parties, and (g) other benefits.

Originally, only debtors with “aggregate noncontingent liquidated secured and unsecured debts as of the date of the filing of the petition or the date of the order for relief in an amount, not more than $2,725,625…not less than 50 percent of which arose from the commercial or business activities of the debtor” were eligible to file a Subchapter V case. However, due to the pandemic, that debt limit was increased by the 2020 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act to $7,500,000.00. That increase was set to expire on March 27, 2021.

A bipartisan group of Senators and Representatives came together to introduce and pass the Extension Act, and President Biden signed it on March 27, 2021. The Relief Act extends the sunset of the relaxed requirements to be eligible to file a Subchapter V case. The increased debt limit of $7,500,000.00 now remains in effect until its new sunset date, March 27, 2022.

Whether you are an individual struggling with substantial business income and are ineligible to file Chapter 13 or a business that does not want the cost or hassle of a traditional Chapter 11, this increased debt limit for Subchapter V of Chapter 11 could make bankruptcy a much more attractive option and provide a means for dealing restructuring your debt. The debt limit may not be extended again next year, so now may be the time to consider your options.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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