$7.5 million Debt Threshold for Subchapter V Bankruptcy Extended Another Year

The COVID-19 Bankruptcy Relief Extension Act of 2021, enacted on March 27, gives small businesses with noncontingent liquidated debts (excluding obligations to insiders and affiliates) that total $7.5 million or less until March 27, 2022, to take advantage of a Subchapter V reorganization. The qualifying debt limit was first increased from $2,725,625 to $7.5 million beginning on March 27, 2020, for one year under an amendment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to Chapter 11 of the U.S. Bankruptcy Code. Without the Extension Act, the $7.5 million debt limit would have expired on March 27.

The Extension Act gives qualifying small business debtors another year to elect to reorganize using the streamlined process made available under Subchapter V, which affords a number of benefits. Unlike a traditional Chapter 11:

• The owners of a debtor reorganizing under Subchapter V can retain ownership of the business even if creditors are not repaid in full, provided the debtor devotes three to five years of its “projected disposable income” to creditor distributions, subject to certain other conditions.
• Only the debtor can file the reorganization plan, and no disclosure statement is required.
• No class of creditors needs to vote to accept the plan before it can be confirmed.
• There is no official committee of unsecured creditors. Instead, a standing trustee is appointed to facilitate plan confirmation. 
• The debtor can pay the administrative expenses of bankruptcy over time rather than on the effective date of the plan.
• The debtor does not need to pay certain governmental fees.
• An individual debtor can modify debt secured by a principal residence if the debt was used primarily in connection with the debtor’s business and not to acquire the residence. 

(Read our alert on Subchapter V for small-business debtors here.)

Under the Consolidated Appropriations Act, 2021 (CAA), small-business debtors were granted more benefits. Under the CAA, Subchapter V debtors can obtain extra time—a total of 120 days—to pay rent if the business has suffered a COVID-19-related hardship. The deferred rent can be paid over time under the debtor’s reorganization plan. Debtor-lessees also now have 210 days to assume or reject commercial real estate leases, a period that can be increased by an additional 90 days with the court’s permission. In addition, creditors that give concessions to financially troubled companies that later enter bankruptcy will have reduced preference exposure under certain circumstances. (Read our alerts on the CAA’s benefits here and here.) The Extension Act does not alter the sunset date for the benefits under the CAA, most of which expire at the end of December 2022. 

Financially troubled companies should evaluate whether reorganization under Subchapter V can alleviate the hardships they face while the benefits of the Extension Act and the CAA remain available.