Despite Recently-Lowered Debt Limits, Subchapter V Remains Attractive Option for Small Business Restructuring

The Small Business Debtor Reorganization Act (“SBRA”) introduced Subchapter V to the U.S. Bankruptcy Code in 2019, offering a streamlined and cost-effective Chapter 11 bankruptcy process specifically designed for small businesses.

Debt Limit Changes

Initially, Subchapter V was available to small business debtors with non-contingent, liquidated debts totaling no more than $2,725,625. Recognizing the financial strain caused by the COVID-19 pandemic, Congress enacted the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in March 2020. Among its many provisions, the CARES Act temporarily increased the debt limit for Subchapter V eligibility to $7.5 million.

On June 21, 2024, this temporary debt limit increase expired.  Accordingly, for subchapter V cases commenced on or after June 21, 2024, the applicable debt limit is the original limit enacted in the SBRA, as adjusted per 11 U.S.C. § 104, or $3,024,725.

There are ongoing efforts in Congress to raise the Subchapter V debt limits once again. While the legislative process can be unpredictable, there is optimism within the business and legal communities that Congress will act to increase the debt limits.

Why Subchapter V Remains an Attractive Option

Despite the reduced debt limits, Subchapter V remains an attractive option for eligible businesses considering restructuring. Here’s why:

• Streamlined Process: Subchapter V eliminates many of the procedural hurdles associated with traditional Chapter 11 bankruptcy. There is no requirement to form a creditors’ committee unless the court orders otherwise, reducing complexity and legal expenses.
• Cost Efficiency: Administrative costs are significantly lower under Subchapter V. Debtors are not required to pay quarterly U.S. Trustee fees, which can be substantial in traditional Chapter 11 cases. Subchapter V also allows debtors to pay post-petition administrative expenses, such as professional fees, over a period of time, rather than paying them in full in cash on the effective date of the plan.
• Debtor-Friendly Provisions: Subchapter V does not follow the absolute priority rule and may allow owners to retain their equity interest without fully paying off unsecured creditors, provided the reorganization plan does not discriminate unfairly and is fair and equitable.
• Expedited Timelines: The process moves more quickly, with a status conference held within 60 days of filing and a reorganization plan due within 90 days. This acceleration can reduce uncertainty and help businesses return to normal operations sooner.

The recent changes to Subchapter V’s debt limits present challenges, but they do not diminish the value of this reorganization tool for eligible small businesses. The streamlined process, cost savings, and debtor-friendly provisions continue to make Subchapter V an appealing option for restructuring. Given the ongoing efforts in Congress to raise the debt limits, there may soon be expanded opportunities to access this efficient restructuring pathway.

In the meantime, consulting with experienced bankruptcy counsel can help businesses navigate their options, understand the implications of recent changes, and develop strategies to achieve financial stability. If you would like to discuss your small businesses’ restructuring options, please feel free to reach out.