Congress Extends Higher Debt Ceiling for Small Business Bankruptcies

Ward and Smith, P.A.
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We previously informed you that if you are a small business that needed to file bankruptcy to save your company, then you may be able to take advantage of Subchapter V of Chapter 11 of the Bankruptcy Code. 

The new subsection, which took effect in February 2020, creates a more streamlined and less expensive Chapter 11 reorganization path for small business debtors.  Under the law as originally passed, to be eligible for Subchapter V, a debtor (whether an entity or an individual) had to be engaged in commercial activity, and its total debts -- secured and unsecured – must be less than $2,725,625.  At least half of those debts must have come from business activity. 

In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which raised the Subchapter V debt ceiling for one year to $7,500,000.  The higher debt ceiling was scheduled to expire on March 27, 2021.  Late last week, the United States House of Representatives passed the Senate-amended version of H.R. 1651, the “COVID-19 Bankruptcy Relief Extension Act of 2021,” to extend the $7,500,000 debt ceiling through March 2022.  President Biden signed the measure into law over the weekend.

Subchapter V has proven popular, with over 1,400 cases filed in the last year.  Approximately 1/3 of those cases could not have proceeded under Subchapter V but for the higher debt limits.  The American Bankruptcy Institute reports that Subchapter V cases are experiencing higher plan-confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11.

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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