Concerned Congress Fails to Act, Returns Debt Limit to $2.7 Million and Reduces Availability of Sub-Chapter V Protection for Small Businesses | Kelley Drye & Warren LLP

For now, the Sub-Chapter V debt limit is down to $2.7 million. Overshadowed by controversial confirmation hearings for historic Supreme Court nominee Ketanji Brown Jackson, the Senate Judiciary Committee failed to act on the bill that would have made the 7.5 debt limit increase permanent. million dollars and allowed more small businesses to file for Chapter 11 Subchapter V bankruptcy. $5 million expired on March 27, 2022.

As bankruptcy professionals await news on whether Congress will act, the delay will have real consequences for small businesses with uninitiated debt between $2.7 million and $7.5 million, which will not have more rights to seek protection under Subchapter V – the easier, cheaper and faster version of Chapter 11 with the aim of helping them reorganize successfully.

If approved, the Bankruptcy Threshold Adjustment and Technical Corrections Act (S.3823, 117th Cong. § 2(a) (2022)) would have eliminated the sunset provision of the CARES Act (Pub. L. No. 116-136, § 1113(a), 134 Stat. 281, 310 –11 (2020)) and permanently increased the Subchapter V debt limit to $7.5 million. Even without S.3823, the leverage limit will automatically increase to $3,024,725 on April 1, 2022 per the routine adjustments recently announced by the United States Judicial Conference. Adjustment of certain dollar amounts in the Bankruptcy Code, 87 Fed. Reg. 24, 6625 (February 4, 2022).

The Senate Judiciary Committee does not currently have a hearing scheduled to consider S.3823, but Congress can further increase the debt limit by passing an amended version of the bill. We will continue to monitor and provide updates on Kelley Drye’s Blog on Bankruptcy Law.

Even if an amended version of the bill passes, some argue that more changes are needed to prevent large corporations and private equity funds from taking advantage of Subchapter V to circumvent the safeguards that Chapter 11 provides to creditors. . Our experience with Subchapter V suggests that, even more so than in Chapter 11 cases, creditors need to be actively involved as soon as possible for a number of reasons, including lack of oversight by a creditors’ committee, the limited role of the subchapter V trustee, accelerated schedule of the plan, and the ability of shareholders to retain their interests in reorganized debtors even if unsecured creditors are not fully paid.

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