Subchapter V Alert–Congress Begins Legislative Action to Extend $7.5 Million Debt Ceiling, Which Remains Set to Expire on March 27, 2021, if Not Passed and Enacted

Subchapter V Small Business Reorganizations

The Small Business Reorganization Act (“SBRA”) went into effect on February 19, 2020. SBRA added “Subchapter V” to the Bankruptcy Code, which affords small business debtors the option of pursuing chapter 11 restructuring under either the substantive, and procedural laws and rules of (a) “traditional” chapter 11, or (b) Subchapter V. SBRA was designed to provide certain benefits for small businesses, including no disclosure statement requirement or creditor’s committee, no competing plans or U.S. Trustee quarterly fees, payment of administrative expense claims through the life of a Subchapter V plan and abolition of the absolute priority rule.

As originally enacted, a debtor was eligible for Subchapter V if it owes less than $2,725,625 million in non-contingent, liquidated secured and unsecured debts. Subsequently, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted March 27, 2020, increased the eligibility debt ceiling to $7.5 million until March 27, 2021. We observe that statistics show many small businesses have taken advantage of the increased eligibility window. According to the American Bankruptcy Institute (ABI), more than 1100 Subchapter V cases were filed after the CARES Act’s effective date. As of this writing, more than 200 Subchapter V cases have been filed in 2021. Since SBRA went effective, most Subchapter V cases have been filed in the Fifth, Ninth, and Eleventh Circuits.

The Subchapter V alternative to traditional chapter 11 is cost-effective and has reportedly been a success. See, e.g., In re Ellingsworth Residential Cmty. Ass’n, Case No. 20-01346 (KSJ) [Dkt. No. 340] (Bankr. M.D. Fla. Oct. 16. 2020) (eight months); In re Desert Lake Group, LLC, Case. No. 20-22496 (KRA) [Dkt. No. 115] (Bankr. D. Utah Sept. 30, 2020) (five months); In re Olson, Case No. 20-23408 (RKM) [Dkt. No. 59] (Bankr. D. Utah Sept. 16, 2020) (four months); In re Sustainable Restaurant Holdings, Inc., Case No. 20-11087 (JTD) [Dkt. No. 212] (Bankr. D. Del. July 16, 2020) (two months). According to judges and other constituents, most cases are successful where the Subchapter V Trustee is proactive in facilitating a consensual plan and settlements, particularly in the early stages of the case. Cases are also reportedly more successful when small business debtors develop reliable projections.

On February 25, 2021, it was reported that Senators Dick Durbin (D-IL) and Chuck Grassley (R-IA) introduced a legislation to extend the expiring debt ceiling for an additional year to March 27, 2022. The new legislation, COVID-19 Bankruptcy Relief Extension Act, seeks to provide additional relief for small businesses continuing to face economic challenges due to the ongoing COVID-19 pandemic.

The proposed legislative extension may be encouraging news to some. However, the proposed legislation also seeks to extend several modifications made under the CARES Act to the Bankruptcy Code (e.g., statutory definitions of current monthly income and disposable income in chapter 7 and 13 cases, respectively), which may or may not be more controversial. Until the uncertainty of the proposed legislation is removed by passage and enactment, one might expect to see a spike in Subchapter V filings between now and March 27.

Conclusion

Subchapter V was designed as an option for small businesses and a cost-effective distress tool that could allow debtors to retain ownership of their business and obtain a fast-track process to reorganization.

The new legislation may be welcome news for companies with debts between $2,725,625 and $7.5 million, who would otherwise be forced to file for the more cumbersome traditional chapter 11 or forgo bankruptcy altogether and likely liquidate if the current debt ceiling is not extended. However, it is not obvious that the legislation will be passed and enacted in time, in part due to other features of the proposed legislation.

Absent a solution to fast-track the new legislation extending the current debt ceiling, it would be understandable to see an increase in Subchapter V filings between now and March 27, 2021.