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A day late and nearly $5 million short? : Bill Introduced to Make Subchapter V $7.5 Million Debt Limit Permanent as Temporary Extensions | Fox Rothschild LLP

On March 14, 2022, Senator Chuck Grassley (R-IA) introduced a bill that, if passed, would make permanent the $7.5 million debt limit applicable to debtors under the sub- Chapter V of Chapter 11 of the Bankruptcy Code which was granted only temporary status under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) for the previous two years. Of course, as bankruptcy practitioners might expect, the Bankruptcy Threshold Adjustment and Technical Corrections Act, S. 3823, 117th Cong. (as presented to S. Comm. on the Judiciary, March 14, 2022) (the “Act”) substantially and permanently extends the scope of Sub-Chapter V relief through a quiet cross-reference to previously enacted legislation (the offspring of which is discussed below). Despite the law’s humble language, the proposed change promises a wider range of small businesses and business owners a faster, more affordable path to bankruptcy reorganization.

On February 19, 2020, the Small Business Reorganization Act (the “SBRA”) has become effective. The brainchild of the American Bankruptcy Institute (the “ABI”) Chapter 11 Reform Study Commission, SBRA established Subchapter V of the Bankruptcy Code to deal with the increasingly time- and cost-prohibitive reorganizations imposed on “main street” family businesses. “. However, to ensure that only small businesses and business operators have access to the truncated Subchapter V proceedings, Section 1182(i)(B)(1) of the Bankruptcy Code has limited the term “debtor” for the purposes of Subchapter V to a person carrying on business or business with aggregate debts not exceeding $2,725,625.

And then, as with any contemporary story, came the COVID chapter. The CARES Act, which was signed into law by President Trump on March 27, 2020, offered sweeping legislative responses to the predicted economic toll the coronavirus pandemic would take on the United States economy. As part of this guidance, the CARES Act provided for a temporary increase in the Subchapter V debt limit from $2,725,625 to $7.5 million. The CARES Act debt limit increase was scheduled to end a year later on March 27, 2021, but was extended to March 27, 2022 by the COVID Bankruptcy Relief Extension Act. -19.

The law simply references Section 1113(a)(5) of the CARES Act – the sunset provision – and simply provides that it “is amended by deleting subsection (5).” However, this simple legislative change would almost permanently triple the debt ceiling. In a press release, the ABI “applauded” the law for raising the debt ceiling and noted that since SBRA’s enactment, “more than 3,000 debtors have elected to file under the subchapter V of chapter 11”. The law also found bipartisan support, having been introduced with the co-sponsorship of Sen. Richard J. Durbin (D-IL), Sen. Sheldon Whitehouse (D-RI) and Sen. John Coryn (R.-TX).

Still, the timing could have been better. As of the date of this article, the debt limit has reverted to its original limits under SBRA due to the sunsetting provisions of the CARES Act and the COVID-19 Relief Extension Act. of bankruptcy. As the law moves through Congress, Subchapter V practitioners and potential debtors affected by the reduction in the debt ceiling will have to look forward to a permanent solution. Until then, small business debtors whose debt exceeds the debt limit of $2,725,625 but is less than the statutory $7.5 million have a tough decision to make: wait for the law to pass and enacted before bringing a case under Subchapter V, or bring a case under Chapter 11, then seek to convert the case to Subchapter V after the law is passed, or dismiss the case and refile under Subchapter V. This post will be updated if and when the law is passed by the Senate and signed into law. .

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