Shawn D. Cox | Hodges & Davis Law Firm Northwest Indiana

The Small Business Reorganization Act of 2019 (the “SBRA”) became effective on February 19, 2020. The SBRA streamlined the Chapter 11 process through a new Subchapter V of Chapter 11. Notable benefits to debtors of a Subchapter V reorganization under the SBRA are an expedited plan confirmation process and the elimination of a creditor’s committee. Most importantly, it is not necessary to obtain plan approval from an impaired class of creditors, provided that the bankruptcy court determines that the plan is “fair and equitable” to each impaired class.

As enacted, the SBRA conditioned eligibility for a small business bankruptcy under Subchapter V on an aggregate secured and unsecured debt ceiling of $2,725,625.00. As part of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), that amount was increased to $7,500,00.00. This increase allowed heavily leveraged entities and business owners, as well as entities financing property of significant value, to benefit from the newly enacted provisions of the SRBA during a period of unprecedented economic disruption for many segments of our economy.

Although the CARES Act provisions were originally set to expire on March 27, 2021, the Covid-19 Bankruptcy Relief Extension Act of 2021 extended the increased debt ceiling for another year. Although proponents of bankruptcy reform in Congress have introduced legislation to permanently increase the Subchapter V debt limit, the increased debt limit reverted to its original ceiling on March 27, 2022, subject to adjustments for inflation.

Several temporary amendments to the Bankruptcy Code related to commercial leases will remain in effect for Subchapter V cases through December 27, 2022. Under the Consolidated Appropriations Act of 2021 (the “CAA”), Subchapter V debtors who can show a financial hardship as a result of COVID-19 can, with court approval, postpone the initial payment of rent upon the filing of a case for 120 days, which is 60 days more than generally provided by Section 365(d)(3) of the Bankruptcy Code. Although the rent must be repaid as an administrative expense, some courts may allow deferral until after confirmation of the Subchapter V plan of reorganization. Further, under the CAA amendments, a debtor may take up to 300 days (an increase of 90 days from the generally available 210 days) to determine whether to accept or reject its commercial lease. While most of the CAA amendments favor a debtor/tenant, the CAA also protects certain pre-bankruptcy payments of deferred rent from “clawback” as bankruptcy preferences.

On March 14, 2022, Senator Chuck Grassley introduced, with bipartisan support, the “Bankruptcy Threshold Adjustment Technical Corrections Act,” which sought to permanently reinstate the $7.5 million debt limit for Subchapter V. The Act also seeks to increase the Chapter 13 eligibility debt ceiling to an aggregate sum of $2,750,000. The Senate passed the Act on April 7, 2022 with an amendment that would cause the increased Subchapter V threshold to once again sunset two years after enactment. The bill is now before the House. 

Chapter 11 reorganizations have generally been cost-prohibitive for business debtors, and have required the cooperation of secured creditors and landlords to be successful. Subchapter V created a framework that sought to level the playing field, and the CARES Act and CAA amendments further expanded the opportunities for expedited reorganizations.  Although Subchapter V is currently (and perhaps only temporarily) available to fewer small businesses and business owners, businesses, their owners, as well as their advisors, should continue to consider the possible benefits of bankruptcy in this time of economic uncertainty.

This Article is a brief summary of recent changes to Chapter 11 of the Bankruptcy Code, including the temporary amendments to the SRBA included in the CARES Act and CAA, as well as related pending legislation. The information provided in this article does not constitute legal advice nor does it establish an attorney/client relationship. Should you have any questions regarding this article, please contact Hodges and Davis attorney Shawn Cox.

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