Small Businesses: The Rise and Fall of Subchapter V Bankruptcy Protection Filing with $3 Million Debt Limit

In March 2020, the debt limit for small businesses seeking relief under Subchapter V bankruptcy protection was extended from $2.75 million to $7.5 million in response to the pandemic. However, with the failure of a bill to make this limit permanent, the threshold reverted back to $3 million on June 21. This change means that small businesses with more than $3 million in debt will face complications when filing for bankruptcy.

The Subchapter V bankruptcy protection filing was created as part of the Small Business Reorganization Act in 2020 and provided relief for small businesses with less than $7.5 million in debt. This filing type was cheaper and less time-consuming than the traditional Chapter 11 bankruptcy filing, making it an attractive option for many small business owners.

One of the main benefits of the Subchapter V filing is that it comes with shorter deadlines for filing reorganization plans. This means that small businesses can move quickly to get their affairs in order and start working towards a restructuring plan.

Another benefit is greater flexibility in negotiating restructuring plans with creditors. Under Subchapter V, small business owners have more options when it comes to negotiating terms with their creditors.

In addition, there is no requirement to pay U.S. Trustee quarterly fees under this filing type, which can help small businesses save money during a difficult time.

A trustee is appointed for each case under Subchapter V to work with the small business debtor and creditors to facilitate a reorganization plan. This can be particularly helpful for small business owners who may not have experience navigating complex legal processes on their own.

According to data from the U.S. Trustee Program, Subchapter V filers had a higher rate of plans confirmed by a judge (51%) compared to other types of bankruptcy protection filers (31%) between 2020 and 2023. Additionally, Subchapter V filers had a lower percentage of plans dismissed and a shorter time to confirmation, highlighting the effectiveness of this filing type for small businesses.

Overall, while it’s disappointing that the debt limit has been reduced again, there are still many benefits available under Subchapter V bankruptcy protection for small businesses with more than $3 million in debt who are facing financial difficulties due to COVID-19 or other factors beyond their control.