The More Things Change, The More They Stay The Same? Survival Of Small Businesses Again Dependent On Action From Congress

Fox Rothschild LLP
Contact

Fox Rothschild LLP

Right now, a business with less than $7.5 million in debt can file an easier, cheaper, and more efficient bankruptcy than a traditional Chapter 11.  That privilege will soon be limited to businesses with less than around $3 million of total debt unless Congress acts before June 21, 2024.  This is not the first time small businesses have had to cope with uncertainty surrounding their access to a faster more affordable bankruptcy. 

This blog post discusses the Final Report of the American Bankruptcy Institute’s Subchapter V Task Force, which recommends preserving the $7.5 million debt limit along with other clarifications.  Whether they are adopted in time for the “sunset” of the debt limit remains in the hands of Congress.

The Permanent Impermanence of the Subchapter V Debt Limit

On August 23, 2019, Congress enacted the Small Business Reorganization Act (“SBRA”).  The SBRA established Subchapter V to Chapter 11 of the Bankruptcy Code and became effective on February 19, 2020, right before the COVID-19 pandemic.  Subchapter V was designed to provide a more economical bankruptcy to small businesses in order to preserve as many of a business’s assets as possible.  In defining who could file under Subchapter V, Congress limited availability to businesses with less than $2,725,625 total noncontingent, liquidated debt.  However, as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), Congress temporarily increased the amount of debt a company could have and still file under Subchapter V to $7.5 million. 

This increase was set to expire and revert back to $2,725,625 one year later on March 27, 2021, but was extended to March 27, 2022, by the COVID-19 Bankruptcy Relief Extension Act. Unfortunately, Congress did not beat the buzzer a second time.  The debt cap slid back to the original amount from March 27, 2022, until June 21, 2022, when President Biden signed into law the Bankruptcy Threshold Adjustment and Technical Corrections Act—which has a nice ring to it—which again raised the debt cap back up to $7.5 million, this time until June 21, 2024.  A pattern emerges. 

Why hasn’t Congress made the increased debt cap permanent? It is worth noting that when originally introduced, the Bankruptcy Threshold and Technical Corrections Act was intended not as another band-aid, but rather to change the debt cap to $7.5 million, adjusted for inflation, for good.  So why didn’t Congress go for it?  That’s a question the American Bankruptcy Institute took up last year by creating a Subchapter V Task Force. 

The ABI Subchapter V Task Force Recommends a Permanent Debt Limit Increase

The Task Force issued its preliminary report on December 15, 2023, urging Congress to permanently increase the debt cap to $7.5 million.  This recommendation was based on numerous public hearings, discussions, and a widespread survey.  The preliminary report noted that most judges and practitioners found that the increased debt cap was a benefit and helped make the bankruptcy process more available and work better for debtors.  The Task Force released a final report on April 19, 2024, reiterating support for a permanent increase in the debt cap, giving a detailed breakdown of the methodology used to prepare the report, and recommending some tweaks to the Bankruptcy Code to make Subchapter V even more efficient.  

Not only has Subchapter V been a boon to debtors, but the Task Force found that plans of reorganization under Subchapter V were confirmed at higher rates compared to traditional Chapter 11 filings, and creditors were actually getting paid in the process, a key consideration.  The Task Force noted that since the creation of Subchapter V, almost a third of all Chapter 11 cases have been filed under it and the numbers keep rising.  During 2023, 44% of all Chapter 11 cases were filed under Subchapter V.  Out of these Subchapter V cases, more than a quarter would not have been eligible under the lower debt cap.  The Task Force warned that without access to Subchapter V, these businesses likely would have shuttered—harming communities, creditors, and the economy.

The Final Report revealed the dearth of data on how Subchapter V would function with a lower debt limit since the “temporary” increase in the debt cap has been in place for nearly all of Subchapter V’s existence.  The “consistency” of the $7.5 million debt cap is one factor noted by the Task Force that weighs in favor of its formal adoption as the permanent limit.  The Task Force cited Judge Isicoff’s testimony about the risk of reducing the debt limit with no historical precedent: “Query whether this is a test we want to run at the expense of America’s small businesses, especially now as filings are increasing.” 

The Task Force considered and rejected arguments made by the minority of those surveyed advocating for a lower debt limit.  The Task Force found that Subchapter V still adequately protects unsecured creditors—though admitting no quantifiable data existed to evaluate the concerns—given the projected disposable income test.  The Task Force found that many creditor protections common to Chapter 11 cases remain in place, including the right to seek conversion or dismissal, expand the trustee’s powers, move for relief from stay, or object to confirmation.  Additionally, Subchapter V enhanced protections, such as the exclusion of single asset real estate debtors.  If it ain’t broke, don’t fix it. 

The Task Force’s Additional Recommendations Would Further Expand the Debt Limit

The Task Force addressed two other issues in calculating whether a debtor had exceeded the Subchapter V debt limit.

First, the Task Force considered whether the debt cap should be changed to include debts owed to affiliates or insiders.  The Task Force did not find any merit to this change, noting that it could work to discourage investments in smaller businesses which often take the form of owners, shareholders, or related entities extending loans or credit.  Weakening small businesses’ attractiveness to potential investors could undermine the point of Subchapter V: to get small businesses back on their feet again.  

Second, the Task Force recommended changes to Section 1182(1)(A) to clarify the treatment of future lease obligations.  Section 1182(1) excludes contingent and unliquidated debts from the Subchapter V debt limit calculation.  However, the Task Force found that long-term, unexpired leases, if treated as noncontingent liquidated debts, could be so large as to push an otherwise qualifying debtor above the debt limit.  The Task Force recommended changes to Section 1182(1) to address conflicting case law concerning the treatment of unexpired lease objections that would expressly exclude such obligations from the debt limit calculation.

The Continued Viability of the $7.5 Million Debt Limit Hangs in the Balance of Congressional (In)Action

While the Task Force recommends making the increased debt cap permanent, there is no way to know if Congress will meet the deadline this time.  On April 17, 2024, Senator Dick Durbin introduced bipartisan bill S.4150 which proposes extending the increased debt limit for another two years.  The bill is currently being reviewed by the Committee on the Judiciary and no vote has occurred, even though the debt cap is set to expire less than two months from now.  Without congressional intervention, the debt cap will revert back to its pre-pandemic amount of $2,725,625 ($3,024,725 adjusted for inflation pursuant to Bankruptcy Code Section 104) on June 21, 2024. 

Any small business considering a Subchapter V filing might want to file soon or risk being limited in their filing options by Congress’s failure to act.

[View source.]

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. Attorney Advertising.

© Fox Rothschild LLP

Written by:

Fox Rothschild LLP
Contact
more
less

PUBLISH YOUR CONTENT ON JD SUPRA NOW

  • Increased visibility
  • Actionable analytics
  • Ongoing guidance

Fox Rothschild LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide