Small businesses across the U.S., already enduring economic uncertainties, now face another hurdle on the horizon. As June 2024 approaches, the expiration of the Subchapter V debt limit threatens to alter the landscape for struggling small business debtors.
The Small Business Reorganization Act (SBRA), enacted in 2020, codified Subchapter V of Chapter 11 of the U.S. Bankruptcy Code. Subchapter V was enacted to provide a more efficient and affordable process for small businesses seeking to restructure their debts.
The debt limit for Subchapter V, initially set at $2,725,625 and later adjusted for inflation to $3,024,725, was increased to $7,500,000 under the CARES Act. However, this increased debt limit is set to expire and will revert back to $3,024,725 on June 21, 2024 unless Congress intervenes.
The repercussions of reverting to the lower debt limit are significant. Countless small businesses seeking to reorganize may find themselves ineligible and unable to access the benefits of Subchapter V. Instead, small businesses would be required to file a traditional Chapter 11 and incur higher costs, a longer process, and a decreased likelihood of success.
The American Bankruptcy Institute recently highlighted the significance of this restructuring tool, reporting that Subchapter V bankruptcies have constituted over 25% of all Chapter 11 cases since February 2020 and a staggering 44% of cases in 2023. Notably, it is estimated that over 25% of these Subchapter V debtors would have been deemed ineligible for relief under the lower limit.
A bi-partisan effort is underway through the 2024 Bankruptcy Threshold Adjustment and Technical Corrections Act. Recently introduced in the Senate, this proposed legislation seeks to extend the $7,500,000 debt limit for an additional two years. Maintaining the debt limit would ensure access to Subchapter V, aiding small businesses unable to afford reorganization under a standard Chapter 11 case.
Without prompt action from Congress, there may be a surge of Subchapter V filings before June 21, as small businesses on the brink of bankruptcy may accelerate their plans to file under Subchapter V to take advantage of the higher debt limit, resulting in a run on the courthouse. If the higher debt limit expires, distressed businesses will likely pursue out-of-court workouts, receiverships and assignments for the benefit of creditors instead of Chapter 11.
