Subchapter V Debt Ceiling Restored to $7.5 Million

Ward and Smith, P.A.
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In a welcome feat of bipartisanship, Congress passed a bill to restore the Subchapter V debt limit to $7.5 million, and President Biden signed it into law on June 21. 

Subchapter V of Chapter 11 of the Bankruptcy Code, 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 – had to 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 to $7.5 million for one year.  Congress extended it to March 27, 2022.  It expired at that time, with the debt ceiling reverting to the original $2,725,625.  With the new law, the $7.5 million debt ceiling will remain effective until June 21, 2024.    

Subchapter V has proven popular, with over 3,400 cases filed in the last two years (83 in North Carolina).  Many of those cases could not have proceeded under Subchapter V but for the higher debt limits.  The American Bankruptcy Institute has reported 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.  Anecdotally, most debtors in North Carolina are filing under Subchapter V if they are eligible.

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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