Historically, struggling small businesses looking to the Bankruptcy Code for salvation rather than liquidation had only one option: a proceeding under Chapter 11. Indeed, Chapter 11 has given countless companies the breathing room needed to reorganize and restructure their debts rather than close up shop for good. However, the costs, complexities, and often glacial pace of Chapter 11 proceedings made it too burdensome or even infeasible for many smaller companies, leaving them no choice but to call it a day and file a Chapter 7 bankruptcy petition to help them resolve their outstanding obligations.
This shortcoming eventually drew the attention of legislators who, in 2019, established a new section of the Bankruptcy Code – Subchapter V of Chapter 11 – specifically designed to provide smaller businesses with a more viable and streamlined path to restructure their debts while maintaining operations. Unlike traditional Chapter 11 cases, Subchapter V does not require the formation of a creditors’ committee unless ordered by the court for cause. Instead, a single trustee is appointed who generally can move expeditiously to assist with the reorganization process. This omission significantly reduces administrative expenses and speeds up the proceedings. Additionally, Subchapter V cases typically move quicker than traditional Chapter 11 proceedings. The debtor must file a reorganization plan within 90 days of filing for bankruptcy, a much shorter timeframe than the flexible deadlines in conventional Chapter 11 cases. The expedited timeline encourages a quicker resolution and reduces the period in which the business is essentially in limbo.
When proceedings under this new chapter began in February 2020, eligibility was limited to entities with aggregate, noncontingent, liquidated, secured, and unsecured debts of no more than $2,725,625. A debtor must also be engaged in commercial or business activities to seek relief under Subchapter V, with at least 50% of its debts arising from these activities.
Within weeks after the first Subchapter V petition was filed, however, the COVID-19 pandemic struck and spurred the federal government to take action on several fronts to address the crisis, including the passage of the CARES Act. That legislation, passed in March 2020, temporarily raised the debt threshold for Subchapter V eligibility to $7.5 million. Congress extended it several times thereafter, allowing thousands more businesses devastated by lockdowns to avail themselves of this critical new lifeline.
And avail themselves they did. Between February 19, 2020, and September 30, 2023, Subchapter V proceedings accounted for approximately 30% of all Chapter 11 bankruptcy filings in the U.S., according to the American Bankruptcy Institute.
However, time expired on the last extension of the higher $7.5 million threshold on June 21, 2024. As such, the Subchapter V debt limit reverted to $3,024,725.
The result was unsurprising. As reported by Epiq AACER, a bankruptcy analytics firm:
The impact of the lower debt eligibility limit on Subchapter V filings has been substantial. Between January 1 and June 21, 2024, there were 1,153 Subchapter V cases filed — an increase of 66.2 percent from the same period in 2023. Since then, 391 Subchapter V cases have been filed, an increase of only 4.5 percent from last year.
Only time will tell whether increased limits will be restored that helped thousands of small businesses survive and emerge from financial distress. Until and unless that happens, the failure to extend the higher thresholds for Subchapter V eligibility and the more limited availability of these proceedings make it much harder for small businesses to get back on their feet instead of having to liquidate their assets. That said, if you believe your distressed business may qualify under the lower threshold and want to find a way to move forward rather than liquidating, Subchapter V remains an avenue worth exploring.
If you have questions about or want assistance with a Subchapter V bankruptcy, or seek to pursue a Chapter 11 as cost-effectively as possible, please contact Anthony D’Artiglio.
