President Biden Signs Bill Extending Temporary $7.5 Million Subchapter V Debt Limit Increase Into 2024

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Today, President Biden signed into law the Bankruptcy Threshold Adjustment and Technical Corrections Act, S. 3823, 117th Cong. (the “Act”), which, among other things, continues the temporary expansion of subchapter V eligibility.  Section 1182(i)(B)(1) of the Bankruptcy Code originally limited the term “debtor,” for subchapter V purposes, to a person engaged in commercial or business activities with aggregate noncontingent, liquidated debts not exceeding $2,725,625.  The Act extends the temporary increase of the debt limit to $7.5 million that was first enacted at the outset of the COVID-19 pandemic.  The new extension lasts for a two-year period from the Act’s enactment, and also applies retroactively to cases filed on or after March 27, 2022.

The Act represents another patch in ongoing efforts to permanently increase subchapter V eligibility that started shortly after the Small Business Reorganization Act (the “SBRA”) introduced subchapter V of the Bankruptcy Code in February 2020.  As we have discussed in our previous post on the subject, the SBRA’s original $2,725,625 debt limit was first increased to $7.5 million on March 27, 2020 with the enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).  This original expansion of subchapter V eligibility was only intended to last for one year—to March 27, 2021—but was extended another year by the COVID-19 Bankruptcy Relief Extension Act.  The Act now further extends the temporary increase by two years from enactment and provides for the retroactive debt limit increase necessary to cover the gap between the March 27, 2022 sunset of the COVID-19 Bankruptcy Relief Extension Act and the enactment of the Act.

The further extension under the Act—while not permanent—will grant a broader swath of small business debtors renewed access to the streamlined provisions of subchapter V.  In his comments in support of the legislation, Representative Cliff Bentz (R-OR) observed that “[a]n additional 2 years of normal post-pandemic bankruptcy activity will give us a better understanding of the underlying policy issues and will help guide the future design of our bankruptcy system.”  We will have to wait until the sunset of the provisions of the Act approach to see whether the legislature will consider either a further or permanent expansion of the eligibility criteria. 

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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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