New Pandemic Law Fails to Extend Subchapter V Eligibility Limit

By: Donald L Swanson

So . . . the second, bi-partisan pandemic bill has made its way through both houses of Congress. It has been approved by politicians in both parties. It is signed by the President and is now law. 

Here is a link to the text of the bi-partisan law.  It’s called the “Coronavirus Response and Relief Supplemental Appropriations Act” and is a part of the “Consolidated Appropriations Act, 2021,” consisting of 5,593 pages.

Bi-Partisan Law

Since the new law is supported by both sides of the political aisle, there is no surprise that it covers such topics as mediation and bankruptcy. That’s because both topics tend to be non-partisan and apolitical: one because everyone likes it and the other because no one does.

Mediation provisions include, (i) grants for farm mediation laws enacted by various states, (ii) funds for federal mediation and conciliation services, and (iii) funds for the National Mediation Board. [Note: To find these mediation provisions, search the link above for the word “mediation.”]

Bankruptcy provisions allow debtors in Subchapter V, Chapter 12 and Chapter 13 to receive funds under the new law — this is a major change from prior PPP funding, which excluded bankruptcy debtors from funding benefits. [Note: To find these bankruptcy provisions, search the link above for the word “bankruptcy” — appearing on a page numbered 183 (the linked page is 2,106) is the heading “SEC. 320. BANKRUPTCY PROVISIONS.”]

Subchapter V Bankruptcy Omission

One glaring omission from the new bi-partisan law this: its fails to extend the $7.5 million total-debt eligibility limit for Subchapter V relief.  That limit had been set by Congress and the President, on a bi-partisan basis, under the first pandemic legislation—the CARES Act.  However, the $7.5 million limit will expire in less than three months, unless Congress and the President act to extend the limit.

The linked law was a prime opportunity to extend that eligibility limit. The fact of its omission from the bi-partisan law raises a fear that the issue is now politicized.

The omission is a huge disappointment for many potential debtors trying to avoid bankruptcy. Now, they may have to file before the $7.5 million limit expires (no matter what their circumstances might be), because they won’t be eligible for Subchapter V under the lower limit. The lower limit will return many small businesses to regular Chapter 11, where many will have little hope of staying in business.

Some History—Subchapter V Eligibility

August 23, 2019:  The Small Business Reorganization Act of 2019 becomes law, which creates Subchapter V for small businesses with a total-debt eligibility limit of $2,725,625.

March 27, 2020: The CARES Act becomes law because of the pandemic, increasing the Subchapter V total-debt eligibility limit to $7.5 million—for one year.

December 21, 2020.  The second coronavirus relief bill is passed by both houses of Congress, which bill fails to extend the $7.5 million temporary debt limit for Subchapter V eligibility.

March 26, 2021.  The temporary $7.5 million total-debt limit for Subchapter V eligibility will expire (unless extended by Congress and the President), returning that limit to $2,725,625.

Observation—A Non-Partisan and Apolitical Issue

Bankruptcy is, typically, a non-partisan and apolitical issue.  That’s because no one likes bankruptcy, and it’s hard for partisans to get worked-up over issues like cash collateral and adequate protection and absolute priority. 

So . . . bankruptcy is one of those subjects upon which the political parties and their partisans can agree, even during a hyper-politicized era.  The Small Business Reorganization Act of 2019, the Family Farmer Relief Act and the CARES Act (all enacted in August of 2019 or March of 2020) are prime examples of bankruptcy laws enacted during high political tensions.  

Disappointment

What’s disappointing is this: the sense of a bi-partisan consensus on Subchapter V eligibility is gone! Consider this:

  • The CARES Act is a bi-partisan law adopted by both houses of Congress, approved by politicians in both political parties, and signed by the President — it establishes the $7.5 million eligibility limit for Subchapter V;
  • The new law is, essentially, a nine-months-later version of the CARES Act;
  • The new law is also bi-partisan, adopted by both houses of Congress, approved by politicians in both political parties, and on the President’s desk; but
  • The new law fails to extend the $7.5 Subchapter V eligibility limit, which is set to expire in less than three months. 

The concern is that the eligibility limit is now a partisan issue:

  • The new bi-partisan law is on the same pandemic-relief subject as the CARES Act that produced the $7.5 million limit, the pandemic is still with us, and the $7.5 million expiration date is less than three months away; and
  • If the Subchapter V eligibility issue is now politicized, the question of what’s best for our bankruptcy system is in jeopardy of being distorted by political bickering.

Possibilities Remain

It is entirely possible that the new houses of Congress and the new President will extend the $7.5 million eligibility limit for Subchapter V (on a bi-partisan basis), before it expires on March 26, 2021.

Or perhaps we’ll be on pins-and-needles in March, wondering if the politicians can get their act together, sufficiently, to get the extension accomplished.   

There is always hope.

Conclusion

Even in the best of times, politics can be a dirty, rotten business in which national interests succumb to partisan distortions.

Here’s hoping the Subchapter V eligibility limit, at $7.5 million, can maintain the non-partisan and apolitical character with which it was enacted.     

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