Sub-Chapter V Debt Ceiling Restored to $7.5 Million – Insolvency/Bankruptcy

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In a welcome feat of bipartisanship, Congress passed a bill to restore the Sub-Chapter V debt limit to $7.5 million, and President Biden signed it into law on June 21.

Subchapter V of Chapter 11 of the Bankruptcy Code, which came into effect in February 2020, creates a more streamlined and less costly route to Chapter 11 reorganization for small business debtors. Under the law as originally enacted, to be eligible for Subchapter V, a debtor (whether an entity or an individual) had to be engaged in a commercial activity and his total debts – secured and unsecured – had to be less than $2,725,625. At least half of these debts must come from a commercial activity.

In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which raised the Subchapter V debt ceiling to $7.5 million for one year. Congress extended it until March 27, 2022. It expired at that time, with the debt ceiling reverting to the original $2,725,625. With the new law, the $7.5 million debt cap will remain in effect until June 21, 2024.

Subchapter V has proven popular, with more than 3,400 cases filed in the past two years (83 in North Carolina). Many of these cases could not have been handled under subchapter V without the higher debt limits. The American Bankruptcy Institute reported that Subchapter V cases experience higher plan confirmation rates, faster plan confirmation, more consensual plans, and better profitability than if these cases had been classified as traditional chapter 11. Carolina files under Subchapter V if eligible.

Lance Martin is a United States Bankruptcy Court panel subchapter V trustee for the Western District of North Carolina.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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