In February 2020, Congress established a new subchapter of Chapter 11 of the Bankruptcy Code aimed at easing the burden and costs of reorganization for small businesses. This new Subchapter V, enacted under the Small Business Reorganization Act of 2019 (SBRA), significantly streamlined the ordinary Chapter 11 process for certain “small business debtors.”
An in-depth overview of the SBRA and its most notable changes can be found HERE.
Initially, only businesses with less than $2,725,625 in total debt were eligible to take advantage of this streamlined reorganization. However, in response to the COVID-19 pandemic, Congress passed the Coronavirus Aid, Recovery, and Economic Security (CARES) Act which raised the “debt ceiling” under the SBRA from $2,725,625 up to $7,500,000. This increase has allowed more small businesses to be eligible for the more streamlined and cost-effective reorganization process. However, the increased debt ceiling under the SBRA is set to “sunset” or expire on March 31, 2021.
To date, Congress has not passed additional legislation which would extend the increased debt ceiling past the March 31 deadline. Nonetheless, Senators Dick Durbin and Chuck Grassley have recently introduced new bipartisan legislation called the COVID-19 Bankruptcy Relief Extension Act. If passed, this bill would extend the heightened debt ceiling for an additional year through March 31, 2022.
If this new legislation is not passed before March 31, small businesses with debts in excess of $2,725,625 will be required to file under the traditional Chapter 11 rather than the streamlined Subchapter V. As a result, these small businesses experiencing financial difficulties should closely monitor the legislation and consider filing bankruptcy prior to March 31 to ensure they are eligible to proceed under Subchapter V.
