On February 19, 2020, Congress enacted the Small Business Reorganization Act (“SBRA”) to, among other things, streamline the Chapter 11 bankruptcy process for a small business by creating Subchapter V of the Bankruptcy Code. Under the SBRA, a “small business” was one with less than $2,725,625.00 in debt. Few businesses, however, were eligible to take advantage of these new provisions because their debts exceeded the cap.

In the wake of the financial crisis brought on by COVID 19, the debt limit was increased to $7,500,000 as part of the CARES Act. The increase in the debt limit dramatically increased the number of businesses eligible for Subchapter V, but it is only temporary. It originally expired on March 27, 2021, but was extended to March 27, 2022, when President Biden signed the COVID-19 Bankruptcy Relief Extension Act of 2021. For a little under three months, the debt limit reverted to the original amount, temporarily depriving entities with debts between $2,725,625 and $7,500,000 from filing under the SBRA. On June 21, 2022, President Biden signed the 2022 Bankruptcy Threshold Adjustment and Technical Corrections Act into law. The bill extended the increase in the debt limit to June 20, 2024, and applied retroactively to include cases filed between March 28, 2022 and June 21, 2022. Despite bipartisan support to maintain the increased debt limits, Congress failed to pass the bill, and on June 21, 2024, the increased debt limit expired.

At long last, on March 3, 2026, the bipartisan Bankruptcy Threshold Act Adjustment of 2026 (S. 3977) was introduced in the Senate to permanently extend the debt limit to $7.5 million with respect to all cases that are commenced on or after the effective date of the Act. A similar bill has been introduced in the House. As many businesses are facing financial difficulty, increasing the debt limit will make Subchapter V more accessible, increasing the possibility that owners of troubled businesses will be able to keep their businesses and at the same time significantly reduce their business debt. 

For more information on Subchapter V bankruptcy cases, see:

• Congress Makes it Easier for “Small Business” Owners to Retain Ownership After Bankruptcy
• Commercial Real Estate Disputes in Subchapter V Chapter 11 Cases: Landlord and Tenant Rights in Bankruptcy Proceedings
• Subchapter V Trustee Fees Protected as Administrative Expenses Outside the Ordinary Course of Business

 

Wondering how changes to Subchapter V may impact your business debt? Reach out to Harold Israel or another member of LP’s Financial Services & Restructuring Group.