In late February of 2021, a bipartisan bill was introduced that would extend continued relief to businesses that have been impacted by the Covid-19 pandemic. The bill is referred to as the Covid-19 Bankruptcy Relief Extension Act, is intended to continue certain specific bankruptcy focused provisions that were originally made law in March of 2020 as part of the Coronavirus Aid, Relief and Economic Stabilization Act (the “Cares Act”). The Extension Act, if approved, would continue this relief through March 27, 2022.
The Current Debt Limit In Subchapter V
One of the main items considered by the Extension Act is in regards to the debt limit for Subchapter V chapter 11 bankruptcy debtors. The Cares Act increased the debt limit to $7.5 million for any debtor seeking relief through Subchapter V of the Bankruptcy Code. See 11 U.S.C. 1181-1195. Subchapter V helped to streamline chapter 11 cases for “small businesses” which are typically defined as businesses with non-contingent, secured, and unsecured debts totaling less than $2,725,625. If proceeding under Subchapter V, a debtor is permitted to use a more streamlined and efficient process as compared to a typical chapter case, which includes, among other benefits, the ability to solicit disclosure and confirmation in a single step process, reduce various filing deadlines, and for equity owners to retain ownership without satisfying the absolute priority rule.
The Proposed Extension Of The Debt Limit
The Cares Act allowed these small business debtors to increase the amount of debt up to $7.5 million, if seeking relief under Subchapter V of chapter 11. This increase has had a substantial effect on Subchapter V cases and has allowed many debtors to qualify for this affordable and efficient path, rather than facing the difficulty and expense of a full scale chapter 11 proceeding. To date, there have been approximately 1,500 Subchapter V cases filed, with approximately 70 percent of these plans resulting in a consensual confirmation, which seems to indicate the process is successful and working as intended. The problem is that the $7.5 debt limit expires on March 27, 2021, at which point the debt limit would drop back down to the $2.7 million number. If the Extension Act passes, it will keep the higher debt ceiling in place for at least another year, which will have a meaningful impact on a number of businesses seeking relief.
