On June 21, 2022, President Biden signed a bill into law that retroactively raises the cap on debt for eligibility for subchapter V status. In the author’s opinion, the legislation falls under the category of “better late than never.”
In August 2019, when Congress amended the Bankruptcy Code to create a new subchapter V for small business debtors, the cap for eligibility to file under that subchapter was $2,725,625 in total noncontingent, liquidated, secured and unsecured debt. Like many provisions of the Bankruptcy Code, that number was subject to adjustment every three years to reflect consumer price index changes.
Then, in 2020, COVID-19 arrived. Among the many legislative responses to the crisis, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act raised the cap on eligibility for bankruptcy under subchapter V to $7.5 million, with an expiration date of one year from its enactment: March 27, 2021. As COVID-19 continued to burden the economy, in early 2021 the increased cap was extended to March 27, 2022, by the COVID-19 Bankruptcy Relief Extension Act. Despite the late March expiration of the increased cap, Congress as a whole failed to act until June 2022, even though the bill had bipartisan support. The President signed the bill (S. 3823, Bankruptcy Threshold Adjustment and Technical Corrections Act) into law on June 21, 2022. The law addresses four subjects: subchapter V, eligibility for Chapter 13, the definition of “small business debtor” applicable to small business cases, and the United States Trustee System Fund. Here are the amendments:
Subchapter V. The Bankruptcy Threshold Adjustment and Technical Corrections Act reinstates the $7.5 million cap for two years and applies the revised cap to any cases filed on or after March 27, 2020, and pending on or after June 21, 2022. This enlarged cap is scheduled to sunset two years after the June 21, 2022, effective date of the amendment.
Chapter 13. The Bankruptcy Threshold Adjustment and Technical Corrections Act also makes a major temporary change to the eligibility requirements of Chapter 13. Before the amendment, eligibility was capped at $1,395,875 in secured debt and $465,275 in unsecured debt, for a total of no more than $1,861,150. The June amendment gets rid of the distinction between secured and unsecured debt and sets the cap for noncontingent, liquidated debts at less than $2,270,000. Unlike the changes related to subchapter V, the change only took effect on June 21, 2022. It will also, however, expire two years after its effective date (June 21, 2024) unless Congress acts to extend it.
Other Less Dramatic Changes. The definition of subchapter V “debtor” in Code section 1182 has also been narrowed somewhat to only exclude any debtor or affiliate of any debtor that is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)). This amendment as written also sunsets two years after the amendment’s effective date, but because at the time of the sunset the ongoing definition of “small business debtor” will apply to subchapter V cases, and because that definition was also amended to incorporate the same restriction, the restriction will continue to apply to subchapter V debtors.
Moreover, the law modifies the feasibility requirement for confirmation of a subchapter V plan. Before the amendment, the Bankruptcy Code stated that in order to confirm a subchapter V plan without the consent of all impaired classes, any the plan had to be “fair and equitable” to all impaired, non-consenting classes. “Fair and equitable” was defined in section 1191(c)(3) to require, among other things, that the debtor show:
(A) (i) The debtor will be able to make all payments under the plan; or
(ii) there is a reasonable likelihood that the debtor will be able to make all payments under the plan; and
(B) the plan provides appropriate remedies, which may include the liquidation of nonexempt assets, to protect the holders of claims or interests in the event that the payments are not made.
Thus, as written, it appeared that even if the debtor established by a preponderance of the evidence that it would be able to make all payments under the plan, the plan had to incorporate provisions to protect holders of claims and interests “in the event that the payments are not made.” That apparently was a glitch, and the provision, as renumbered, makes it clear that the plan must include the “remedies” only if the debtor has not proven it would be able to make all payments under the plan. This change also applies to any case filed on or after March 27, 2020, and pending on or after June 21, 2022. It does not sunset.
In addition, Bankruptcy Code section 1183 is amended to provide that a subchapter V trustee may be authorized to operate the business of a subchapter V debtor that is removed from being a debtor-in-possession. Before the amendment, the Code provided for the removal of a debtor-in-possession but did not specify that the subchapter V trustee needed authorization to operate the business of the debtor. This change also applies to any cases filed on or after March 27, 2020, and pending on or after June 21, 2022. It, too, does not sunset.
Small Business Cases. Notwithstanding the introduction of subchapter V for small business debtors, there remain special provisions for small business debtors that elect not to reorganize under subchapter V. These debtors, which are subject to the rules for “small business cases” rather than subchapter V cases, are subject to tight deadlines for plan submission and confirmation and do not have subchapter V trustees appointed in their cases. The definition for debtors in these cases had excluded “any debtor that is a corporation that is an affiliate of an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c).” Now the exemption is narrower: entities that may not be “small business debtors” only include any debtor or affiliate of any debtor that is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)). This amendment also applies to any cases filed on or after March 27, 2020, and pending on or after June 21, 2022. It, too, does not expire.
U.S. Trustee System Fund. The Bankruptcy Threshold Adjustment and Technical Corrections Act also makes technical corrections to the law regarding the United States Trustee System Fund. These amendments are effective “as if enacted on October 1, 2021” and do not sunset.
Clearly, Congress has had a great deal of issues to address, including war in Europe, climate change, and inflation. That being understood, it is unfortunate that Congress failed to act more quickly: subchapter V has proven to be extremely popular and leaving the matter in limbo may well have led to confusion, additional restructuring costs, and additional stress on potential debtors. Between COVID-19, inflation, and supply chain problems, small businesses had already undergone too much stress in the last few years.
These changes were implemented too late for inclusion in the recently published 2022 edition of The Portable Bankruptcy Code & Rules, which contains changes to the Bankruptcy Code through March 2022. All these changes will be set forth in the 2023 edition of The Portable Bankruptcy Code and Rules, which will also feature the many amendments to the Bankruptcy Rules that are expected to become effective in December.
11 U.S.C. § 104(a). ↑
The text of the bill is available at https://www.congress.gov/bill/117th-congress/senate-bill/3823. ↑
For an in-depth discussion of this change, see In re Phenomenon Mktg. & Entm’t, LLC, No. 2:22-bk-10132-ER, 2022 Bankr. LEXIS 2105, 2022 WL 304241 (Bankr. C.D. Cal. Aug. 1, 2022). ↑