Subchapter V Eligibility: Congress Needs To Permanently Extend The $7.5 Million Limit — Now!

By: Donald L. Swanson

The Small Business Reorganization Act of 2019 (aka “Subchapter V”) has been in effect since February 19, 2020. 

And here’s something we’ve learned since then:

• Subchapter V meets a definite need in our society for helping small businesses and owners in financial stress.

I’ve seen the benefits first-hand.  Without Subchapter V, small businesses and their owners have small hope of reorganizing in Chapter 11.  What Subchapter V provides for them is just that: hope for a solution.

Statistics

Here are some interesting statistics on Subchapter V case filings, that appear in the November 2020 issue of the American Bankruptcy Institute Journal [Fn. 1]:

• Many people have taken advantage of the new law—“The 1,000th subchapter V case” was filed in these United States on October 9, 2020 (id. at 30);
• The 1,000 filings have been dispersed among many professionals—(i) “well over 500 individuals have served as lead attorney in one or more cases,” and (ii) “more than 250 trustees have been assigned to at least one case” (id. at 42);
• Both individuals and entities have taken advantage of the new law—26% of the 1,000 Subchapter V debtors are individuals, and 74% are entities (id.);
• Every state in the Union has at least one Subchapter V filing, “except for Rhode Island (where no Chapter 11 cases have been filed since Feb. 19, 2020)” (id. at 31); and
• Subchapter V case filings have increased during each of the last several months—114 case filings occurred in May, 133 in June, 138 in July, 140 in August, 160 in September, and 43 in the first nine days of October (id.).       

Eligibility Fluctuations & Reversion

Congress initially enacted Subchapter V with a total-debt limit of $2.75 million for eligibility.  Then, in March 2020 and because of the pandemic, Congress increased that debt limit to $7.5 million.  This increase has been a superb change—it enabled many debtors in the 1,000 initial cases to take advantage of Subchapter V, because they wouldn’t qualify under the old $2.75 million limit.   

But the $7.5 million increased limit is set to automatically revert to $2.75 million on March 27, 2021, if Congress doesn’t act before then.

Call to Action & Urgency

Congress needs to extend the $7.5 million limit and make it permanent. 

And it needs to do so NOW, so that (i) plans for the future can be made, and (ii) debtors aren’t forced into filing prematurely for the sole purpose of getting in before the debt limit reverts to $2.75 million.

Such Congressional action is needed for the good of small businesses and owners everywhere, whose total debts exceed $2.75 million—and there are lots of them!     

An Old Argument—that’s still pertinent!

In support of this call to action, here’s an argument from an old (1819) U.S. Supreme Court opinion on the need for effective bankruptcy relief.    

The opinion is Sturges v. Crowninshield, 17 U.S. 122 (1819), where the question is whether states can enact bankruptcy laws when Congress fails to do so.  The argument goes like this. 

The need for bankruptcy relief arises from the the nature and condition of human affairs and from necessity:

• the duties of humanity are imperative and indispensable, and must be exercised by some one holding the guardian powers of the community; and
• the power to grant relief in the extremities of debt and indigence is a moral necessity—it is essential for the existence and well-being of civilized and commercial society.

When the states, collectively, granted this power to Congress, the exercise of that power is imposed upon Congress as a duty. 

Why was the power over bankruptcies granted to Congress at all?  The answer is this: so that the power might be exercised, being necessary for the good of the community.

Conclusion

In our present time, it is necessary for the good of our community that the $7.5 million amount, for total-debt eligibility under Subchapter V, be extended and made permanent. 

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Footnote 1: See Ed Flynn, “Subchapter V’s First 1,000 Cases,” XXXIX ABI Journal 11, 30-31, 42-43, November 2020, available at abi.org/abi-journal.   

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