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Did you know that in 2023, about 44% of all Chapter 11 bankruptcies used Subchapter V? Subchapter V bankruptcy is a faster and more affordable option for small businesses to restructure their finances. Let’s explore Subchapter V and how the expired debt limit might affect you. 

Subchapter V is a type of bankruptcy under Chapter 11, the “reorganization bankruptcy,” that allows businesses to continue operating while they restructure their debt. Congress introduced Subchapter V in 2019 through the Small Business Reorganization Act to help small business owners with less than $2.75 million in debt reorganize their finances during bankruptcy. 

Unlike Chapter 11 filing, Subchapter V is more convenient for smaller debtors. Here’s why Subchapter V is popular among small businesses:    

  • It’s Faster: Smaller debtors can experience faster processing times with shorter filing deadlines for reorganization plans.
  • It Offers More Flexibility: Businesses have greater flexibility when negotiating their restructuring plans with their creditors.  
  • No Official Committees: In a Subchapter V case, the appointment of an official committee will be the exception, not the rule. This reduces the administrative burden on the small business debtor of having to pay fees and expenses incurred by the committee’s professionals.   
  • You Get an Appointed Trustee: The United States Trustee Program appoints a trustee to each case.     
  • It’s More Cost-Effective: Because the US Trustee does not require quarterly fees and the processing time is faster, Subchapter V filings are cheaper.    

To help struggling small businesses during COVID-19, Congress temporarily expanded the original debt limit of $2.75 million to $7.5 million, which allowed more small businesses to qualify for Subchapter V. The increased debt limit of Subchapter V was so favorable to smaller businesses that Congress continued to extend the debt limit of $7.5 million in Subchapter V filings in the 2022 Bankruptcy Threshold Adjustment and Technical Corrections Act (BTATCA). However, this popular debt limit expired on June 21, 2024. In response, the Senate introduced a bill in April to extend the BTATCA for two more years. The bill is still pending.    

Currently, the debt limit has reverted to an inflation-adjusted amount of approximately $3 million. Without prompt action from Congress, businesses that don’t qualify under these limits will be forced into longer proceedings and a more costly Chapter 11 process or forced to pursue out-of-court workouts, receiverships, or assignments for the benefit of creditors instead of Chapter 11.   

Don’t wait for Congress to decide the future of Subchapter V. If your business is facing financial challenges, contact our team of restructuring and turnaround experts today. We can help you explore all your options, including Subchapter V eligibility under the new debt limit, and find the most effective path forward for your business. 

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