"My Lawyer Made Me Do It" is Not an Absolute Defense to Bankruptcy Court Sanctions
May 31, 2022
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In a welcome feat of bipartisanship, Congress passed a bill to restore the Subchapter 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 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 – had to 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 to $7.5 million for one year. Congress extended it to 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 ceiling will remain effective until June 21, 2024.
Subchapter V has proven popular, with over 3,400 cases filed in the last two years (83 in North Carolina). Many of those cases could not have proceeded under Subchapter V but for the higher debt limits. The American Bankruptcy Institute has reported 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. Anecdotally, most debtors in North Carolina are filing under Subchapter V if they are eligible.
Lance Martin is a panel Subchapter V Trustee for the United States Bankruptcy Court for the Western District of North Carolina.
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