Senate to extend debt ceiling for Chapter 11 bankruptcies
The Senate unanimously passed a bill to expand the debt limit for Chapter 11 Subchapter V. If passed by the House and signed into law, small business borrowers with up to 7 $500,000 of unconditional and liquidated debt will be eligible for relief under Subchapter V for another two years. The cap had previously been raised to $7,500,000 under the CARES Act in 2020, but fell back to $3,024,725 as of April 1, 2022.
On April 7, 2022, the United States Senate passed amended S. 3823, the “Bankruptcy Threshold Adjustment and Technical Corrections Act,” which would retroactively preserve the $7,500,000 debt threshold for qualify for Subchapter V of Chapter 11 of the Bankruptcy Code for an additional amount. two years. Subchapter V was originally added to the Bankruptcy Code in February 2020 through the Small Business Reorganization Act 2019, as an innovative restructuring platform for small businesses with unliquidated debt. conditional of $2,725,625 or less. However, this debt ceiling was short-lived and quickly increased in March 2020 to $7,500,000 as a COVID-19 relief measure implemented through the CARES Act, Pub. L. n° 116-136 (2020) then extended until March 27, 2022.
Although S. 3823 was introduced on March 14, 2022, as a measure to make the $7,500,000 debt cap permanent, the debt cap increase expired without any action on S. 3823 and now sits at $3,024,725 due to inflationary adjustments. On April 7, 2022, Senator Murphy (D-CT), on behalf of Senator Grassley (R-IA), introduced an amendment (S.Amdt. 5025), co-sponsored by Senators Durbin (D-IL), Whitehouse ( D-RI) and Cornyn (R-TX) (all of whom also co-sponsored the original S. 3823), which imposes a two-year sunset on the $7,500,000 debt ceiling and, with this amendment, legislation passed in the Senate by unanimous consent.
Sub-Chapter V made significant changes to corporate restructuring and creditor rights, particularly in light of expanded eligibility for the “small business debtor” qualification. Indeed, Subchapter V has steadily increased as a percentage of commercial Chapter 11 filings over the past two years and, if the proposed legislation is enacted, this trend is expected to continue. Parties who may be involved in Subchapter V proceedings should also note that Section 3823 proposes various other changes to the existing law, including a correction to the rules regarding affiliated debtors and other clarifications.
The bill then goes through the House of Representatives, where it must be passed and then signed by President Biden before becoming law. The Chamber is on vacation until April 26, 2022, so S. 3823 (and small business debtors) will likely have to wait at least until then.