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Bipartisan Bill Introduced to Extend Subchapter V for Small Businesses and American Bankruptcy Institute Released Study on the Law’s Effectiveness

Bipartisan Bill Introduced to Extend Subchapter V for Small Businesses and American Bankruptcy Institute Released Study on the Law’s Effectiveness

At last week’s AIS webinar, we gave you an update on the upcoming expiration of the increased debt limits for chapter 13 debtors and small businesses. The limits were raised during the pandemic and are set to expire in June. After the webinar, and within the last few days, there were two new developments:

First, Senate Judiciary Committee Chairman Richard Durbin introduced S. 4150, the “Bankruptcy Threshold Adjustment Extension Act.” The bill would extend the higher debt limits for two more years. If enacted, debtors with secured and unsecured debts up to $2.7 million would remain eligible for chapter 13 relief and small businesses with up to $7.5 million in debts would be eligible for the more generous and expedited bankruptcy process allowed under subchapter V of chapter 11. The bill is bipartisan, with Republican Senators Lindsey Graham, Charles Grassley, and John Cornyn joining with Democrats Sheldon Whithouse and Chris Coons in co-sponsoring the Durbin bill.

As discussed during the webinar, there is concern among some in the creditor community that substantive revisions should be made in subchapter V before the debt limits are extended.

The second major news item was the release of a year-long study of subchapter V sponsored by the American Bankruptcy Institute (ABI). The study was led by a Task Force of nine bankruptcy judges and other experts and involved input from scores of bankruptcy jurists, practitioners, and academics.

As expected, the ABI study endorsed the current expanded debt limit and concluded that the evidence “overwhelmingly shows that Subchapter V is working as Congress intended, allowing smaller companies to reorganize their businesses and make payments to their creditors.”

Here are some of the significant Task Force recommendations:

  • The Task Force endorsed the current $7.5 million debt limit on eligibility. The Task Force rejected suggestions for either a reversion back to the $2.7 million limit or an increase up to $10 million. According to the Task Force, the current eligibility works, and there has been no experience under the lower limit, which was raised almost immediately after the law’s effective date when the pandemic gripped the country. The Task Force also rejected a recommendation to increase the limit to $10 million on the grounds that further study and data would be needed to justify the hike.
  • Of note, the Task Force rejected creditor recommendations to include certain affiliate and insider debt in calculating the debt limit. Some banks believe that the current exclusion allows large financial interests to manipulate the system and obtain relief for their own benefit. The Task Force said it found no evidence to justify the change.
  • Although the ABI report contains testimony and data from experts in support of the Task Force conclusions, the ABI panel agreed that more data would be helpful in future analyses. Among other things, the panel recommends that debtors provide additional data in their final report filed with the court, including the cost of case administration and payments made to creditors before case closing.

The full ABI Task Force Report may be read here.

Commentary provided by Clifford J. White, Senior Advisor - Bankruptcy Compliance for AIS.