Understanding the New "Fast-Pass" Small Business Bankruptcy Process
March 24, 2020
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We previously informed you that if you are a small business that needed to file bankruptcy to save your company, then you may be able to take advantage of Subchapter V of Chapter 11 of the Bankruptcy Code.
The new subsection, which took effect in February 2020, creates a more streamlined and less expensive Chapter 11 reorganization path for small business debtors. Under the law as originally passed, to be eligible for Subchapter V, a debtor (whether an entity or an individual) had to be engaged in commercial activity, and its total debts -- secured and unsecured – must be less than $2,725,625. At least half of those debts must have come from business activity.
In March 2020, in response to the COVID-19 pandemic, Congress passed the CARES Act, which raised the Subchapter V debt ceiling for one year to $7,500,000. The higher debt ceiling was scheduled to expire on March 27, 2021. Late last week, the United States House of Representatives passed the Senate-amended version of H.R. 1651, the “COVID-19 Bankruptcy Relief Extension Act of 2021,” to extend the $7,500,000 debt ceiling through March 2022. President Biden signed the measure into law over the weekend.
Subchapter V has proven popular, with over 1,400 cases filed in the last year. Approximately 1/3 of those cases could not have proceeded under Subchapter V but for the higher debt limits. The American Bankruptcy Institute reports that Subchapter V cases are experiencing higher plan-confirmation rates, speedier plan confirmation, more consensual plans, and improved cost-effectiveness than if those cases had been filed as a traditional Chapter 11.
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