Subchapter V Debt Limit Likely to Sunset at the End March

The subchapter V debt limit is likely to revert to $2,725,625 on March 28, 2022. Hope remains that Congress will soon restore it to $7.5 million.

By Aaron E. de Leest

On March 28, 2022, the provision in the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act,” which increased the eligible debt limit for subchapter V debtors to $7,500,000 will sunset, and the debt limit will revert to $2,725,625.  The Senate has made efforts to remove the sunset provision in the CARES Act and thereby permanently increase the debt limit to $7,500,000.  However, the Senate’s bill, which was introduced on March 14, 2022, is stalled in the Senate Judiciary Committee.  Because the House is not in session this week, it does not appear that the Senate’s bill will make it through Congress and onto the President’s desk before the March 28, 2022 sunset.  Therefore, it is likely that, at least for the short term, the debt limit for subchapter V debtors will be substantially reduced to $2,725,625.

 

What does this mean for small businesses? 

Subchapter V provides a streamlined, less expensive, chapter 11 reorganization process for small business debtors.  See our prior blog post: https://danninggill.com/the-small-business-reorganization-act-of-2019-sbra/.   When Congress created subchapter V, it made $2,725,625 the maximum amount of debt that a debtor could owe and be eligible for subchapter V.  In response to the Covid-19 pandemic, in March 2020, Congress increased the limit to $7.5 million, but the limit expired after one year.  In 2021, Congress extended the higher debt limit to March 27, 2022.  When the higher cap expires, businesses will be ineligible to file subchapter V if they have more than $2,725,625 in debt.  To seek reorganization in bankruptcy, those debtors will need to file for regular chapter 11.