Breaking Bankruptcy News: Subchapter V Debt Limit Extension

On February 25, 2021, Sen. Richard Durbin (D-IL) and Sen. Charles Grassley (R-IA), the Chair and Ranking Member of the U.S. Senate Judiciary Committee, respectively, announced the introduction of a bipartisan bill that will provide continued relief to businesses impacted by the ongoing COVID-19 pandemic. The bill, referred to as the COVID-19 Bankruptcy Relief Extension Act, would extend for an additional year—to March 27, 2022—certain bankruptcy-related provisions originally enacted into law in March 2020 as part of the Coronavirus Aid, Relief, and Economic Stabilization Act (“CARES Act”).

Under the CARES Act passed on March 27, 2020, Congress increased to $7.5 million the debt limits for debtors seeking relief under the recently-enacted Subchapter V of chapter 11 of the Bankruptcy Code. 11 U.S.C. §§ 1181-1195 (Subchapter V, enacted in 2019 through the Small Business Reorganization Act, streamlined chapter 11 cases for businesses with non-contingent, secured, and unsecured debts totaling less than $2,725,625. By proceeding under Subchapter V of the Bankruptcy Code, a debtor may, among other things, solicit disclosure and confirmation in a single-step confirmation process, make use of expedited filing deadlines, and retain equity ownership without those equity holders satisfying the “new value” exception to the absolute priority rule under 11 U.S.C. § 1129(b)).

If passed, the COVID-19 Bankruptcy Relief Extension Act will ensure that Subchapter V continues to play a critical role in restructuring small and medium-size businesses impacted by the pandemic. Subchapter V has been popular—and successful—for debtors and creditors. To date, approximately 1,500 Subchapter V bankruptcy cases have been filed, with approximately 70 percent resulting in consensual plans of reorganization. Gibbons Director Natasha Songonuga, one of only two Subchapter V Trustees appointed to serve in the District of Delaware, agrees: “The high percentage of consensual confirmations shows that Subchapter V is working as intended. Small businesses are now able to hit the pause button long enough to negotiate with lenders, landlords, and other creditors. And because of the contingent and non-insider debt exclusions to eligibility, we are seeing an increasing number of larger, more complex businesses seeking to take advantage of the benefits of Subchapter V.”

The Financial Restructuring & Creditors’ Rights Department at Gibbons will continue to monitor the legislation as it moves through Congress.