Bankruptcy Legislation Update: Senate Passes Bill Preserving $7.5 Million Eligibility Threshold for Subchapter V
The Senate has passed a bill by unanimous consent to extend the heightened debt ceiling for Subchapter V of Chapter 11. If passed by the House and signed into law, small business borrowers with up to $7,500,000 in noncontingent, liquidated debts will be eligible for relief under Subchapter V for another two years. The ceiling was previously raised to $7,500,000 as part of the CARES Act in 2020, but lapsed back to $3,024,725 as of April 1, 2022.
On April 7, 2022, the United States Senate passed amended S. 3823, the “Bankruptcy Threshold Adjustment and Technical Corrections Act,” which would retroactively preserve the $7,500,000 debt threshold to qualify for Subchapter V of Chapter 11 of the Bankruptcy Code for an additional two years. Subchapter V was initially added to the Bankruptcy Code in February 2020 through the Small Business Reorganization Act of 2019, as an innovative restructuring platform for small businesses with noncontingent liquidated debt of $2,725,625 or less. However, that debt ceiling was short-lived and quickly increased in March 2020 to $7,500,000 as a COVID-19 relief measure implemented through the CARES Act, Pub. L. No. 116-136 (2020) and subsequently extended through March 27, 2022.
Although S. 3823 was introduced on March 14, 2022, as a measure to make the $7,500,000 debt ceiling permanent, the increased debt ceiling expired without any action on S. 3823 and now sits at $3,024,725 due to inflationary adjustments. On April 7, 2022, Senator Murphy (D-CT), on behalf of Senator Grassley (R-IA), introduced an amendment (S.Amdt. 5025), co-sponsored by Senators Durbin (D-IL), Whitehouse (D-RI), and Cornyn (R-TX) (all of whom also co-sponsored the original S. 3823), which imposes a two-year sunset on the $7,500,000 debt ceiling and, with that amendment, the legislation passed in the Senate by unanimous consent.
Subchapter V has brought about significant changes to business restructuring and creditors’ rights, particularly in light of the expanded eligibility to qualify as a “small business debtor.” Indeed, Subchapter V has steadily grown as a percentage of commercial Chapter 11 case filings over the past two years and, if the proposed legislation is enacted, that trend is likely to continue. Parties that may be involved in Subchapter V proceedings should also take note that S. 3823 proposes various other changes to the existing law, including a correction to rules regarding debtor affiliates and other clarifications.[1]
The bill goes next to the House of Representatives, where it must pass and then be signed by President Biden before it becomes law. The House is in recess until April 26, 2022, so S. 3823 (and small business debtors) will likely have to wait until at least then.
ArentFox Schiff’s Bankruptcy & Financial Restructuring group will continue to monitor this issue. If you have any questions, please contact one of the authors or the Arent Fox professional who usually handles your matters.
[1] The proposed legislation also makes important changes to eligibility under Chapter 13 by changing the definition of an eligible debtor to “an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated debts of less than $2,750,000 or an individual … and such individual’s spouse … that owe … noncontingent, liquidated debts that aggregate less than $2,750,000”. This not only raises the absolute limit on the amount of debt that an individual may hold and still be eligible for Chapter 13 relief, but also simplifies the determination by making reference only to “noncontingent, liquidated debts”. The current text of 11 U.S.C. § 109(e) (which S. 3823 would amend) requires that an individual debtor not exceed separate ceilings for unsecured (currently $465,275) and secured debts (currently $1,395,875). Like the Subchapter V increase, the increased debt limits for Chapter 13 will also sunset two years after the date that the legislation becomes law.
