Subchapter V’s $7.5 Million Debt Limit Is Extended (But Only For A Year!!)

COVID-19 Bankruptcy Relief Extension Act of 2021

By: Donald L Swanson

It’s finally happened — on bi-partisan and nearly-unanimous votes. The $7.5 million debt limit for Subchapter V eligibility, set to expire on March 27, 2021, is extended.

Yet, it took a March 2021 fire drill to do so (see this webpage), which fire drill concluded on the very day the limit was set to expire:

  • March 8, 2021, the “COVID-19 Bankruptcy Relief Extension Act of 2021” is introduced in the House of Representatives;
  • March 17, 2021, the Act passes the House of Representatives by a vote of 399 to 14, under a “suspension of the rules”;
  • March 24, 2021, the Act passes the Senate with an amendment “by Unanimous Consent”;
  • March 26, 2021, the House of Representatives approves the amended Act “without objection”; and
  • March 27, 2021, the President signs the Act into law.

New Expiration Date — Why?!

The new Act consists of two pages, the primary provision of which (i.e., extending the $7.5 million debt limit) is this:

  • “Section 1113 of the CARES Act . . . is amended— . . . by striking ‘1 year’ and inserting ‘2 years’.”

The extension is for only one year!

Say what!? We have a bi-partisan, nearly-unanimous approval of a bankruptcy law — but it’s effectiveness is for only one year? How can this be? If the new law is valued nearly-unanimously, how can it’s value be limited to 365 days? Will we be doing another fire drill in March of 2022? Or will the law’s value cease to exist on or before the 365th day?

Reality and Theory

The reality is this: Congress has always despised formerly-successful entrepreneurs and is loathe to provide effective bankruptcy relief for them. It’s now obvious that, when compelled to provide some such relief, Congress can only bear to do so for the smallest-possible length of time. 

Successful entrepreneurs may well be Congress’s small business darlings . . . but that’s only during the time of their success.  Throw in a financial failure, and Congress turns on them—hard!

Why?  My latest theory is this:

  • it’s a hold-over from the long-discredited presumption that financial reversals are caused by an entrepreneur’s wrong-doing; and
  • it harkens back to the days (a couple centuries ago) when financial reversals were treated as crimes. 

But in a market economy, where successes and failures are dictated by market forces, such views are out of touch and harmful. 

Subchapter V

Subchapter V, with its $7.5 million debt limit, stands as a shining exception to the idea that Congress despises formerly successful entrepreneurs. 

But Congress has declared—twice—that this shining exception is only a temporary thing: as soon as the pandemic is gone, so is the exception.  Then, we’ll then be back to Subchapter V with a $2.7 million debt limit, and formerly successful entrepreneurs will be out in the bankruptcy cold—again.

Small Businesses and Entrepreneurs

Congress is apparently ok with very-small businesses in bankruptcy (those with total debts < $2.7 million). 

But small businesses that have succeeded and expanded over time—then failed—rarely have total debts of < $2.7 million.  And their entrepreneurs, as guarantors of the business’s major debts, are in the same boat.  The amount of such guaranteed debt is based on the size and needs of the business (not on the entrepreneur’s personal assets and income) and can be repaid only if the business succeeds.  Once the business fails, both the business and its entrepreneur become incapable of paying the guaranteed debt. 

So . . . what are they (the business and its entrepreneur) supposed to do with guaranteed debt when the business fails?  Congress gives no answer to this question, other than saying, “Don’t look to the Bankruptcy Code for help, when the pandemic is gone!”


Congress’s failure to make Subchapter V’s $7.5 million limit permanent is a defect in the Subchapter V statutory scheme.

** If you find this article of value, please feel free to share. If you’d like to discuss, let me know.

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