Client Alert: Congress Extends Eligibility for Small Business Chapter 11 Bankruptcy

Congress and President Biden have acted to restore the debt limit for Subchapter V bankruptcies to $7.5 million. This is good news for small businesses considering bankruptcy protection in the current uncertain economic climate.

Passed unanimously in the Senate and overwhelmingly in the House, the “Bankruptcy Threshold Adjustment and Technical Corrections Act” restores to $7.5 million the debt limit for Subchapter V bankruptcies. The original limit was $2.7 million but was increased during the COVID pandemic to $7.5 million. However, the increase sunset in March of this year. The new increase sunsets in June of 2024.

The new law also clarifies some language with respect to issuers and trustee authority. It also provides for an increase in the limit based on the inflation rate every three years moving forward (which in theory presumes that the limit will be extended again in 2024).

Subchapter V offers small businesses the best of both types of commercial bankruptcy – the ability to retain control over their business under Chapter 11 (traditionally used by larger businesses due to its higher costs and more complex procedures) and the simplicity and lower overall cost of Chapter 7 (traditionally the avenue for small businesses who are typically liquidating their business). Many of its provisions lower the costs associated with fees and the process itself and streamline reporting and disclosure requirements.  Subchapter V allows a business to confirm a plan in circumstance where it would be unable to do so in a full-blown Chapter 11, and it eliminates much of the costs (such as a creditors committee) normally attendant to Chapter 11. While the expenses of a full-blown Chapter 11, and the difficulty confirming a plan, make a Chapter 11 unattractive for many small to mid-sized privately held companies, Subchapter V opens an important avenue for them.

This is particularly important for businesses who are now having to pay the terms they negotiated with their landlords and with vendors to defer payments like rent during the worst days of the pandemic. Many business owners are unable to meet those deferred obligations and are now seeking a way to restructure their debt while still holding on to their businesses.

KTAP has extensive experience in bankruptcy law, working with companies of all sizes and circumstances and helping them through the Chapter 7, Chapter 11 and Subchapter V processes. If you are a business owner considering restructuring your debt through bankruptcy protection and have any questions, please contact us at or call us at (212) 868-1888.