As we have reported on bankruptcy filings for the past year, one of the most striking changes we have seen over the past year is a significant increase of about 17 percent in total filings so far this year.
As we dive deeper into those numbers, we see an even bigger increase in small business filings made under subchapter V, which fast-tracks the process. This year, small business subchapter Vs have risen by an incredible 44 percent.
Over the next several months, Congress will have to decide whether to revise current SBRA eligibility requirements. For small business and creditor advocates alike, this Congressional action will bear watching.
Background on Subchapter V
At the end of 2020, Congress passed a bi-partisan bill– you heard me right, I said bi-partisan, a word seldom heard here in Washington, D.C. It was called the Small Business Reorganization Act or SBRA. The purpose was to make it easier for small businesses to navigate the bankruptcy reorganization process successfully. The theory was that if debtors could re-negotiate their debts, the business could survive, jobs could be saved, and creditors would be more likely to be paid back.
The key features of the bill were:
- expedited procedures so cases may be completed in several months rather than over years;
- different repayment rules so owners of small businesses keep their stake in the company, as long as they devote a large share of their profits to repaying creditors; and
- a trustee for every case to help ensure the debtor reports accurately on its financial progress and negotiates a consensual repayment plan without the usual litigation.
Although subchapter V was initially designed for small businesses with debts no greater than $2.7 million, the debt limit was raised to $7.5 million as part of emergency COVID relief legislation. About one-third of the approximately 1500 subchapter V cases filed last year fell within the original debt limit and the temporary $7.5 million limit.
The Success of SBRA
Although the track record of SBRA only covers about two years, all measures point to successful results. According to official data from the Justice Department’s U. S. Trustee Program:
- About three out of every four small businesses that seek bankruptcy reorganization do so under subchapter V.
- The percentage of subchapter V debtors who obtain court confirmation of repayment plans is about double the percentage of other small businesses. And subchapter V cases move through the confirmation process about 40 percent faster.
- Not only that but nearly seven out of ten SBRA plans are consensual, meaning that creditors agreed without dissent.
Sunset of Higher Debt Limits and Other Changes
Between now and next June 21st, Congress must vote to extend the debt limit of $7.5 million or else it will revert to its original level. That will affect more than 500 small business debtors each year.
If Congress acts, there are several other tweaks to the law that many experts recommend as well, such as:
- Tightening the rules governing affiliates that file. The well-known cases of InfoWars podcaster Alex Jones and his media company have highlighted issues concerning strategically filing cases to evade the debt limits.
- There are other proposals under study as well, involving technical and administrative changes.
The American Bankruptcy Institute has a Task Force reviewing all these issues.
With the expiration of COVID relief to small businesses, many more individuals and companies may seek bankruptcy protection in the future. That will spotlight subchapter V and whether it should be limited or improved between now and next summer.
We will keep a close watch on this.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.