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Expanded Bankruptcy Subchapter V Eligibility for Small Business Debtors Extended for Another Year

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On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was signed into law. This legislation extends the increased debt limit for small businesses to be eligible to reorganize under subchapter V of the Bankruptcy Code. While the increase in this debt limit remains temporary, the extension gives many small businesses another year to consider subchapter V as a potential option for their emergence from the economic impacts of the COVID-19 pandemic.

What is Subchapter V of the Bankruptcy Code?

Subchapter V of the Bankruptcy Code is a recent addition to the Bankruptcy Code. It was established by the Small Business Reorganization Act of 2019 (SBRA), which went into effect on February 19, 2020. Subchapter V provides a quicker, simplified process small business debtors can elect to use for their chapter 11 bankruptcy reorganizations. Subchapter V’s streamlined process can provide significant benefits, often decreasing the time and legal expenses traditionally associated with chapter 11 bankruptcy reorganizations and allowing some small business owners to retain ownership of their businesses. As a result, subchapter V provides a more cost-effective and accessible option for addressing debts.

However, as originally enacted under SBRA, subchapter V eligibility was significantly limited. Only debtors with up to $2,725,625 in debt were eligible to use the subchapter V process. This debt limit left many small businesses unable to access the benefits of subchapter V.

The CARES Act Expands Subchapter V Eligibility

Shortly after subchapter V went into effect, an unanticipated development occurred: the unfolding of the COVID-19 pandemic and the accompanying economic impacts. In response, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted, taking effect on March 27, 2020.

The CARES Act included several bankruptcy-related provisions, including an increase to the debt limit for subchapter V eligibility. Under the CARES Act, debtors with up to $7,500,000 in debt could now use the subchapter V reorganization process. This amendment significantly expanded the availability of subchapter V reorganizations for small businesses, and many have utilized subchapter V for their reorganizations in the past year. But like much of the bankruptcy-related relief provided under the CARES Act, the increased debt limit for subchapter V eligibility is temporary and was scheduled to sunset on March 27, 2021.

The COVID-19 Bankruptcy Relief Extension Act of 2021 Extends Expanded Subchapter V Eligibility for Another Year

On March 27, 2021, the COVID-19 Bankruptcy Relief Extension Act of 2021 was signed into law. Among other relief, this legislation extends the higher $7,500,000 debt limit for subchapter V eligibility for another year. The new sunset date is March 27, 2022.

With many small businesses exploring how to recover from the economic consequences of the COVID-19 pandemic, this extension gives small businesses with between $2,725,625 and $7,500,000 in debt an additional year to consider filing bankruptcy under subchapter V. Congress has extended this eligibility at a critical time for the recovery of small businesses impacted by COVID-19.