Senate’s Bankruptcy Threshold Adjustment and Technical Corrections Act Retains $7.5 Million Eligibility for Subchapter V Small Business Debtors

The Small Business Reorganization Act (SBRA) went into effect on Feb. 19, 2020, creating Subchapter V of the Bankruptcy Code. Acknowledging that a bankruptcy proceeding is not "one size fits all" and that a Chapter 11 proceeding can be prohibitively expensive and lengthy for a business, the goal of the SBRA was to reduce costs and increase efficiency in bankruptcy proceedings for small business debtors.

The SBRA therefore set forth abbreviated and simplified procedures for qualifying "small business debtors," which have a maximum aggregate secured and/or unsecured debt of $2,725,625, which increased to $3,024,725 on April 1, 2022, among other requirements. The aggregate excludes debt owed to affiliates or insiders, as long as the majority of the debt comes from business activities (Aggregate Debt Limit).

For a qualifying small business debtor, Subchapter V creates several advantages over the traditional Chapter 11 process. For example, a creditor's committee is not appointed in a Subchapter V case absent exceptional circumstances. In lieu of a creditor's committee, a Subchapter V trustee is automatically appointed to "facilitate the development of a consensual plan of reorganization."

Subchapter V also promotes the speedy resolution of cases under the subchapter by requiring that the debtor in possession file a plan within 90 days after the bankruptcy petition is filed. The Subchapter V process also is less expensive for a debtor, as the small business debtor is not required to pay quarterly fees to the United States Trustee's Office. Additional advantages bestowed upon a qualifying Subchapter V debtor are that (i) the debtor maintains the exclusive right (and requirement) to file a plan throughout the case,1 and (ii) the debtor need not satisfy the absolute priority rule as a condition of confirmation.2

Instead of the absolute priority rule, a Subchapter V debtor must dedicate, at a minimum, the amount of its disposable income for a period of three to five years, providing an easier path to cramming down a plan on unsecured creditors. As these features of a standard Chapter 11 case often provide significant leverage for creditors, these differences in a Subchapter V case can make this option very attractive to a potential qualifying debtor.

Shortly after the enactment of the SBRA, businesses experienced unprecedented and historic economic pressures as the Covid-19 pandemic shuttered them and impacted supply chains worldwide. With the intent to enable small businesses to use Subchapter V in order to survive the pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, increased the Aggregate Debt Limit to $7.5 million. The increased Aggregate Debt Limit was, pursuant to the CARES Act, set to expire on March 27, 2021. As the pandemic wore on, the expiration of the increased Aggregate Debt Limit was subsequently extended by the COVID-19 Bankruptcy Relief Extension Act of 2021 for an additional year, to March 27, 2022.

After expiration of the increased Aggregate Debt Limit on March 27, 2022, the definition of "debtor" in Subchapter V cases reverted back to its prior definition ― "a small business debtor," which includes a $3,024,725 Aggregate Debt Limit as of April 1, 2022.

As of April 21, 2022, more than 3,250 cases have been filed since the enactment of the SBRA, highlighting Subchapter V's perceived utility and advantages.3 It is not clear how many of those debtors would have qualified as a small business debtor absent the increased debt ceiling in the CARES Act.

On March 14, 2022, the Bankruptcy Threshold Adjustment and Technical Corrections Act (Corrections Act), was introduced in the Senate in an attempt to make the $7.5 million Aggregate Debt Limit permanent. On April 7, 2022, an amendment was introduced that would impose a two-year sunset on the increased Aggregate Debt Limit. Similar to the CARES Act, the Corrections Act, if enacted, would amend Section 1182(1) of the Bankruptcy Code to include the increased Aggregate Debt Limit of $7.5 million in Subchapter V's definition of a "debtor" and, upon sunset, would revert and refer to the definition of a "small business debtor" in Section 101(51D) of the Bankruptcy Code. The Corrections Act also would apply retroactively to all cases commenced under Chapter 11 on or after March 27, 2022 that remain pending as of the date of enactment.

The Corrections Act, as amended, was unanimously approved by the Senate on April 7, 2022. The House of Representatives received the bill on April 11, 2022. If passed by the House, the Corrections Act will reach the president's desk before becoming law.4 In the meantime, small business debtors will be subject to the reverted Aggregate Debt Limit of $3,024,725 as of April 1, 2022.

1 Section 1189(a) of the Bankruptcy Code provides that "[o]nly the debtor may file a plan under this subchapter." Comparatively, Section 1121 provides that, in a standard Chapter 11 case, if a debtor does not file within 120 days of the bankruptcy filing (as may be extended but may not exceed 18 months), any party in interest may file a plan.

2 Section 1129(b)(2) of the Bankruptcy Code encompasses what is commonly referred to as the absolute priority rule. The absolute priority rule directs that, absent consent by the impacted class of creditors, a senior class must be paid in full before classes of claims and equity that are junior to it in priority can receive any money or property in a Chapter 11 plan.

3 See Am. Bankr. Inst.: https://app.powerbi.com/view?r=eyJrIjoiNzJmYWJlNDQtMGNlMy00MDA5LThmZWMtODU5YTQyMDRjYWNjIiwidCI6ImI0NDBhOWMyLThjNmYtNGNlYS1iYzI1LWYzZTI0MGJjNGI1ZCIsImMiOjF9 (last visited April 21, 2022).

4 The most up-to-date status of the Corrections Act can be found at the following link: https://www.congress.gov/bill/117th-congress/senate-bill/3823/all-actions?overview=closed#tabs.

-Colleen M. Restel, associate, Lowenstein Sandler

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