On Saturday, March 27, 2021, President Joe Biden signed the “COVID-19 Bankruptcy Relief Extension Act” into law. The law extends the $7.5 million debt eligibility ceiling for personal as well as small and medium business Chapter 11 Subchapter V bankruptcy for another year, to March 27, 2022, among other relief. 

Chapter 11 Subchapter V bankruptcy was added to the Bankruptcy Code in February 2020 under the Small Business Reorganization Act (“SBRA”).  This new subchapter provides a streamlined process for small businesses to reorganize under Chapter 11.   A debtor was originally disqualified from “Subchapter V” relief if its debts—with some exceptions—exceeded $2,725,625.  The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, effective March 27, 2020, amended the SBRA to temporarily increase the debt limit to $7.5 million under Subchapter V for one year. The “COVID-19 Bankruptcy Relief Extension Act” extends that increase to the debt eligibility ceiling for another year.

By eliminating many of the traditional aspects of a Chapter 11 bankruptcy, such as the creditor’s committee and absolute priority rule, Subchapter V offers a viable option for small businesses to avoid liquidation and complete a Chapter 11 reorganization in less time and with reduced complexity, cost, and administrative requirements. As businesses dig out from COVID-19 and relief programs come to an end, such as foreclosure and eviction moratoriums, creditors may begin to see more businesses turn to bankruptcy relief to reorganize debt.  By extending the $7.5 million debt ceiling another year, myriad small and medium businesses remain eligible for relief under Subchapter V.

For a primer on Subchapter V, see our July article: The New Streamlined Bankruptcy Solution for Small and Medium Sized Business. For a more in-depth look at issues creditors should consider, see our August article: Chapter 11 Subchapter V: What Creditors Should Expect.