On June 21, 2022, President Joseph Biden signed S.3823 into law. The law, which is effective immediately, makes the following material changes to the Bankruptcy Code.
The $7.5 million debt limit for eligibility for Chapter 11, Subchapter V bankruptcy cases is renewed for another two years:
In 2019, Congress passed the Small Business Reorganization Act (the “SBRA”), creating a new type of Chapter 11 bankruptcy proceeding for Small Business Debtors. Known as a SBRA Bankruptcy or a Subchapter V Bankruptcy, an eligible business may file for Chapter 11 under a streamlined and expedited process, which does not require payment in full of the debts of unsecured creditors. Advocates say that the streamlined procedures greatly improve the ability of small businesses to reorganize under the Bankruptcy Code.
When enacted in 2020, Congress set a debt limit of $2,725,625 for a small business to be eligible to file a Subchapter V bankruptcy petition. This limited eligibility for many small businesses, especially in high-cost states. On March 27, 2020, Congress, as part of the CARES Act, increased the debt limit for Subchapter V bankruptcy to $7.5 million, with a one- year sunset provision (meaning that the debt limit would be reduced back to the original amount after one year). In 2021, Congress extended the sunset provision, to March 27, 2022. On March 28, 2022, the debt limit reverted back to the prior $2,725,625 limit.
Under S.3832, the SBRA debt limit is again increased to $7.5 million. The language in the bill intends to make this increase retroactive to March 27, 2020, the day it was originally increased, and covers any gap period between the date it reverted back to the original amount and the date the bill is signed into law. However, the bill contains another sunset provision, and the debt limit increase again reverts to the original $2,725,625 limit two years from the date the bill is signed into law. This means that the increased debt limit will again need to be extended or a new bill will need to be signed into law by June 21, 2024 if it is to be made permanent.
The law clarifies that privately held corporations are eligible for Subchapter V bankruptcy:
Current law provides that a debtor is not eligible for Subchapter V bankruptcy if the debtor is “an affiliate of an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)).” 11 U.S.C. § 101(51)(D)(B)(iii). This language led to uncertainty if a privately held corporation, which could be deemed an affiliate of an issuer, was eligible for Subchapter V bankruptcy relief. Under S.3823, this language is revised to clarify that only affiliates of a publicly held corporation are not eligible for SBRA bankruptcy. Thus, a privately held corporation and its affiliates may file for Subchapter V bankruptcy relief.
The law increases the Chapter 13 Bankruptcy debt limit to $2,750,000:
Current law limits eligibility for Chapter 13 bankruptcy, which is designed to allow individuals to efficiently restructure their debts through a payment plan in a cost-effective process, to individuals with less than $419,275 in unsecured debts and $1,257,850 in secured debts. Individuals over this limit seeking to restructure their debts are required to file Chapter 11 cases, which can be prohibitively expensive and time consuming.
This limit has now permanently been increased to an aggregate debt limit of both secured and unsecured debt in the amount of $2.75 million. This new limit will likely increase the number of individuals eligible for Chapter 13 relief, especially in high-cost states, and thus will likely also lead to an increase in Chapter 13 bankruptcy filings.
This article was written by Bernard Kornberg, partner at Practus, LLP (Bernard.Kornberg@practus.com).