By: Trev E. Peterson
Congress adopted a series of changes to the Bankruptcy Code in connection with the current pandemic under the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). This article focuses on changes made by the CARES Act applicable to cases involving the new Subchapter V to Chapter 11. Generally Subchapter V cases involve small businesses, but individual debtors who have too much debt to qualify for a Chapter 13 case may be eligible to file under the new Subchapter V.
Subchapter V was adopted by Congress last summer with an effective date of February 19, 2020. Subchapter V streamlines the procedures in Chapter 11 to allow for smaller Chapter 11 cases to be moved through the plan confirmation process faster and in theory for less cost than a traditional Chapter 11 case. The majority of the changes in Chapter 11 made by Subchapter V are beyond the scope of this post. However, the change made by the CARES Act is significant. The CARES Act changes the debt limit in the definition of a small business debtor from $2,725,625 (only Congress would put such an odd number in a definition) to $7.5 million dollars. The increase in the debt cap allows for more businesses to qualify for Subchapter V treatment. The debt increase is only for one year from the March 27, 2020 passage of the CARES Act, so if a business delays filing beyond March 26, 2021 the old debt limit applies.
There are still businesses the do not qualify for Subchapter V. To qualify as a debtor under Subchapter V the debtor has to be a “small business debtor” as defined by the Bankruptcy Code. A “small business debtor” is a person (a) engaged in commercial or business activities, (b) excluding a single asset real estate debtor and (c) whose debts to not exceed the debt limit. The definition excludes many real estate investors who operate a single real property or real estate project.
Making Subchapter V available to more small businesses may result in small businesses being able to use the benefits of Subchapter V to reorganize their businesses after the end of the pandemic. While making Subchapter V available to more debtors may be beneficial, the time limits in Subchapter V requiring the filing of financial information concerning the debtor and requiring the filing of a plan within 90 days from the filing of the case, make Subchapter V attractive only to businesses who can propose a plan within the 90 day time limit.
Congress requires that I disclose that our firm is a “debt relief agency” under the Bankruptcy Code. We help people file for bankruptcy relief under the Bankruptcy Code. As with all articles on this website, the contents of this article are not intended as legal advice for any specific legal problem. Nothing in this article is intended to create an attorney-client relationship between the author and the reader. The author is licensed to practice law in Nebraska only, if you are involved with a bankruptcy in a state other than Nebraska you are encouraged to consult with an attorney licensed in the state in which the bankruptcy case is pending