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The President Signs Bankruptcy Legislation Increasing Eligibility Limits for Subchapter V and Chapter 13

On June 21, 2022, President Biden signed into law Senate Bill 3823, the “Bankruptcy Threshold Adjustment and Technical Corrections Act” (the “Act”).

The Act reinstates the threshold debt limit of $7.5 million for Subchapter V of Chapter 11, retroactive to the original expiration date of March 28, 2022 for an additional two-year period.  The Act also increases the debt limit for Chapter 13 bankruptcy eligibility to $2.75 million, and removes the distinction between secured and unsecured debt for that calculation.

The Act serves to modify the debt limit qualifications for the Small Business Reorganization Act, or “SBRA,” which addressed significant deficiencies and gaps in the Bankruptcy Code for small business debtors.  The increased debt limit will ensure that small businesses are able to take advantage of restructuring under Subchapter V without having to endure or possibly be prohibited from filing a more costly, time and resource consuming Chapter 11 case.  Since its enactment in February 2020, over 3,450 small businesses and individuals engaged in business have taken advantage of filing for bankruptcy under the provisions of the SBRA.[1]

According to a report from the U.S. Small Business Administration[2], small businesses create two-thirds of net new jobs and drive U.S. innovation and competitiveness.  That SBA report indicates that small businesses account for 44% of U.S. economic activity, and are at the forefront of driving innovation, jobs and economic growth in the U.S..  Enactment of this legislation will provide these small businesses with the tools necessary to reorganize should their businesses encounter financial distress in this increasingly uncertain economic environment.

The Act’s increased debt limitation for Chapter 13 cases is also a long awaited change.  Many individuals with disposable monthly income seeking bankruptcy relief have found themselves ineligible under Chapter 7 and over the debt limit to file under Chapter 13.  Now that the President has signed the Act into law, the current Chapter 13 eligibility limits are raised from $419,275 of noncontingent, liquidated and unsecured debt or $1,257,850 of noncontingent, liquidated and secured debt to $2.75 million of noncontingent and liquidated debts, regardless of whether the debt is secured or unsecured.  This will enable many more individuals to file under Chapter 13 and confirm plans which will pay creditors a portion, or in some cases 100%, of the debtors’ obligations to such creditors.

While passage of the Act is welcomed news to the small business community, further action is needed to assist this most important segment of the U.S. economy.  The SBRA enhanced debt limit provisions of the Act will sunset two years after enactment, again restricting small businesses access to Subchapter V and many individuals the opportunity to filing bankruptcy under Chapter 7 or 13.  Legislation to make these eligibility limits permanent should be a top priority.

[1] According to statistics maintained by the American Bankruptcy Institute https://www.abi.org/sbra

[2] https://advocacy.sba.gov/2019/01/30/small-businesses-generate-44-percent-of-u-s-economic-activity/

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