Expanded Subchapter V Is Here to Stay: Debt Limit Raised to $7.5 Million and Sunset Provision Eliminated

Importantly, the eligibility cap limits debt, not assets or revenue, and businesses with total liabilities exceeding $7.5 million may still qualify. Only noncontingent, liquidated debts count toward the limit, excluding debts owed to affiliates and insiders. Contingent and unliquidated claims—including certain claims in pending litigation—do not count. The higher limit is likely to spur more creative eligibility planning as debtors explore ways to bring their qualifying debt within the cap and access the benefits of subchapter V.

Subchapter V offers two principal advantages over traditional chapter 11:

• Lower costs and a faster process. A disclosure statement is generally not required, an unsecured creditors’ committee is ordinarily not appointed, creditors cannot submit competing plans, and there are compressed deadlines for proposing and confirming reorganization plans, reducing administrative expenses and streamlining the case.
• Greater leverage and more favorable confirmation standards. Subchapter V eliminates the absolute priority rule, allowing owners to retain their equity without contributing new capital even if an objecting class of unsecured creditors is not paid in full. It also permits confirmation without accepting an impaired class of creditors. In other words, courts can confirm a reorganization plan for a subchapter V debtor even if not a single creditor class agrees, a significant departure from ordinary chapter 11 requirements. Together, these features give debtors substantially greater negotiating leverage than in a traditional chapter 11.

Effects and Significance
Among other lenders or investors, private equity sponsors may find subchapter V a viable restructuring path for smaller portfolio companies, given the lower cost, the ability to retain equity and the absence of competing plans. Likewise, while acquiring distressed assets in a traditional chapter 11 can carry higher costs and risk, the streamlined subchapter V process may create more opportunities for distressed acquisitions.

These same advantages shift the negotiating dynamics for creditors. Companies previously ineligible for subchapter V now have an additional tool to obtain favorable terms, both in bankruptcy and in out-of-court negotiations. Unsecured creditors, in particular, ordinarily lack a committee to represent their collective interests, and debtors can confirm a plan without an accepting impaired class. Creditors should reassess their negotiating position and consider alternative strategies to strengthen their bargaining power.