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Bipartisan Legislation (S. 3823) Introduced to Make Permanent the SBRA $7.5 Million Debt Limit and to Modify the Qualifications for Filing Chapter 13

Senator Grassley Introduces Bipartisan Legislation to Make Permanent the SBRA $7.5 Million Debt Limit and to Increase the Qualifying Debt Limits for Filing Chapter 13

On March 14, 2022, U.S. Senator Chuck Grassley [R-IA] introduced S.3823, the Bankruptcy Threshold Adjustment and Technical Corrections Act. The Bill has bipartisan support and is co-sponsored by Senators Richard J. Durbin, [D-IL], Sheldon Whitehouse [D-RI], and John Cornyn [R-TX].  The Bill proposes two important changes involving qualifications for filing bankruptcy under Subchapter V of Chapter 11 and under Chapter 13.

The Proposed Bill Will Make Permanent the $7.5 Million Debt Limit Under the Small Business Reorganization Act 

The Small Business Reorganization Act (“SBRA”), which created Subchapter V of Chapter 11, went into effect on February 19, 2020. Subchapter V provides small businesses, as well as certain individuals engaged in business, with a more streamlined process of proposing and confirming a plan of reorganization, as opposed to the more complex and expensive traditional chapter 11 process. Under the originally enacted SBRA, small business debtors with less than $2,725,625 of debt were eligible to file under Subchapter V, however, in response to economic circumstances caused by COVID-19, under the CARES Act enacted on March 27, 2020, the debt limit was increased to $7,500,000 for a period of one year. That increase was again extended until March 27, 2022.

Senate Bill 3823 now provides for a permanent change of the debt limit to $7,500,000. This legislation is time-sensitive because the present $7.5 million debt limit expires on March 27, 2022.

The advantages of filing bankruptcy under Subchapter V are derived from its employment of a streamline process with shorter timelines for filing and confirming a plan, fewer burdensome reporting requirements and creation of an easier and smoother path to confirmation of a reorganization plan. While the SBRA was needed to address significant deficiencies and gaps in the Bankruptcy Code for small business debtors, it fortuitously went into effect in February 2020, right at the beginning of the economic shutdown engendered by the worldwide pandemic.

According to statistics published by the American Bankruptcy Institute, there have been 3078 Subchapter V cases filed nationally between February 19, 2020 and March 15, 2022, which is about 29% of the approximately 10,650 Chapter 11 business cases (including Subchapter V cases) that have been filed over the same period of time.  Based on an early report by Clifford J. White III published in the January 2021 edition of the ABI Journal, plans in Subchapter V cases were achieving confirmation at a rate 6 times greater than businesses in Chapter 11 that could have but chose not to file under Subchapter V.  The permanent debt limitation of $7.5 million will ensure that business debtors will have the continued advantage of achieving a successful reorganization through Subchapter V.

There has been discussion that the debt limit should be increased to $10 million, which would fill an even larger void for small businesses seeking to file under Subchapter V whose debts falls between $7.5 million and $10 million. As a comparison, the debt limit for family farmers under Chapter 12 bankruptcies was recently raised from $4,411,400 to $10 million. The reorganization process in Subchapter V is similar to that of Chapter 12 and a comparable increase in the debt limit should be favored with equal functionality and support.

Modifying the Eligibility Requirements for Chapter 13 Will Eliminate Current Barriers for Individuals Seeking Debt Relief

For years certain debtors have struggled with qualifying for a Chapter 13 based on the low debt limits.  Currently, to be eligible to file under Chapter 13, a debtor, or husband and wife as joint debtors, must have less than $419,275 of noncontingent, liquidated unsecured debt or $1,257,850 of noncontingent, liquidated secured debt.  To the extent that an above means debtor[1] with disposable income seeking to file under Chapter 13 has debts exceeding these limits, the only choice would be to file under Chapter 11 or possibly Subchapter V, both of which would result in the debtor having to incur significantly greater attorney’s fees and costs which may preclude the debtor from being able to file for bankruptcy.  Under the proposed bipartisan legislation, the debt limitation would be increased to an aggregate of unsecured and secured noncontingent, liquidated debts of $2,750,000.

By establishing a debt limitation that combines the amount of debt and eliminates the distinction between secured and unsecured debt, passage of the proposed legislation will avoid much of the litigation involving what is and is not to be considered secured debt in determining whether a debtor qualifies for filing under Chapter 13.

Many factors have contributed to this necessary increase in the Chapter 13 debt limits including rising home prices and mortgage amounts, increasing inflation, interest rates and credit card debt, and ballooning student loan obligations which are subject to higher than market interest rates.  Debtors most likely to benefit from the increased Chapter 13 limits would be guarantors of small business debts, sole proprietors and individuals who own multiple underwater real estate properties who find themselves in financial straits.  While such debtors would otherwise qualify for a Subchapter V, a Chapter 13 would save such debtors filing and attorney’s fees and not burden them with having to prepare and file monthly operating reports and a much more comprehensive reorganization plan.

Creditors will also benefit from the increased Chapter 13 limits as more debtors will qualify for and be able to afford a repayment plan under Chapter 13.

There is a logical synergy for including both of the Subchapter V and Chapter 13 debt limit increases in one piece of legislation.  Since the extension of the Subchapter V $7.5 million debt limit expires on March 27, 2022, it is almost certain the Bill will be signed into law in the next few days, bringing along the necessary Chapter 13 debt limit increase.  The law will be a welcome tool in the bankruptcy arena at a time when it appears the global pandemic is coming closer to an end, but increased inflation and interest rates are certain to be a factor for some time to come.

[1] An “above means debtor” refers to a debtor or joint debtors whose gross income exceeds their state’s median income for a family of the same size as the debtor(s). Generally, an above means debtor with disposable income will not be eligible to file a petition under Chapter 7.

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    Senate Bill 3823 proposes important changes to qualifications for filing bankruptcy under Subchapter V of Chapter 11 and under Chapter 13