Market uncertainties are causing some small businesses to struggle. If you're among them and are considering filing for bankruptcy, you may need to act fast. A temporary change in the laws that determine which debtors are eligible for certain bankruptcy protections is scheduled to expire in June 2024. Unless Congress passes legislation to extend the higher limits, fewer small businesses will qualify for these protections. Here's what you need to know.
The Small Business Reorganization Act of 2019 (SBRA) took effect on February 19, 2020. Under the law, small business debtors with less than $2,725,625 in aggregate noncontingent liquidated secured and unsecured debts (excluding debts to affiliates or insiders) could elect to proceed under new Subchapter V of Chapter 11 of the Bankruptcy Code if they satisfied certain criteria. Chapter 11 bankruptcy is commonly known as a "reorganization" because the debtor's assets and liabilities are reorganized, but the business continues operating.
The SBRA defines "small business debtors" as persons engaged in commercial or business activities if at least 50% of the debt arises from such activities. Primarily owning or operating a single piece of real property doesn't qualify as engaging in commercial or business activities.
Subchapter V imposes shorter deadlines for filing reorganization plans. It also allows greater flexibility in negotiating restructuring plans with creditors. In contrast to other Chapter 11 bankruptcy cases, the U.S. Trustee Program appoints a trustee. The trustee works with the small business and creditors to develop a consensual reorganization plan. Under Subchapter V, a debtor isn't required to pay U.S. trustee quarterly fees.
The CARES Act temporarily increased the SBRA debt limit to $7.5 million for bankruptcy cases filed on or after March 27, 2020, and the COVID-19 Bankruptcy Relief Extension Act of 2021 extended it to March 27, 2022.
The Bankruptcy Threshold Adjustment and Technical Corrections Act (BTATCA), enacted in 2022, extended the increased limit through June 21, 2024. It also increased the debt limit for filing for Chapter 13 bankruptcy — known as "liquidation" — which is available to eligible sole proprietors or self-employed individuals but not businesses. Previously, a debtor had to have less than $464,275 in noncontingent liquidated unsecured debt and less than $1,395,875 in noncontingent, liquidated secured debt to file under Chapter 13. The BTATCA combined the limits into one — $2,750,000 in noncontingent liquidated debt (secured and unsecured). Debtors whose debt exceeds the limit must file for a more costly Chapter 11 bankruptcy.
Important: Contingent debt generally is debt that will arise only if specified conditions occur. Noncontingent debt doesn't have such a requirement. Liquidated debt generally is debt in an amount that is known or easily determined.
In the absence of congressional action, the debt limits for both Subchapter V and Chapter 13 will drop dramatically on June 21, 2024. (See "Potential Fix in the Works," below.) For Subchapter V, the limit will fall to $3,024,725 (due to adjustments for inflation). The pre-BTATCA dual limits will apply for Chapter 13 (with no adjustment for inflation).
The lifting of the debt thresholds by the CARES Act and subsequent legislation was widely expected to lead to a jump in bankruptcy filings — and the prediction appears to have to come to fruition. Business bankruptcy filings rose 40.4%, from 13,481 in 2022 to 18,926 in 2023. And there were 3,000 Chapter 11 and 13 filings in the first quarter of 2024. These figures represent a continuing rebound in filings after more than a decade of sharply dropping totals.
But how much did the higher debt limits contribute to the increase in bankruptcy filings by businesses? According to the American Bankruptcy Institute, nearly 30% of all Chapter 11 bankruptcy cases filed since the enactment of the SBRA have been Subchapter V cases. And more than 25% of these Subchapter V debtors wouldn't have been eligible for Subchapter V relief under the lower limit. Without the higher limit, these debtors would have been forced to file for a traditional Chapter 11 bankruptcy, which would have led to higher costs and a lengthier bankruptcy process.
If your small business is having trouble paying its bills, you might want to consider filing for bankruptcy before the impending expiration date. With the expiration looming, contact your financial and legal advisors as soon as possible for guidance on the best course for your circumstances.
A surge in bankruptcy filings might be on deck this June as the expiration date for the higher limits draws near (see main article). So far, Congress hasn't taken action on the debt limits. But, in April 2023, a bipartisan group of senators co-sponsored a bill, dubbed the Bankruptcy Threshold Adjustment Extension Act, that would extend the higher limits for another two years. It's currently under consideration by the Senate Judiciary Committee.
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