Subchapter V’s $7.5 Million Limit: Sunset? Or Another Fire Drill In Congress?

By: Donald L Swanson

So . . . here we go again. 

We’re four months from a “sunset” of the $7.5 million limit for Subchapter V eligibility.  And we’ve heard nothing from Congress about extending that limit.

Everyone agrees that the $7.5 million limit is a good thing . . . that it’s even a great thing!

Nevertheless, on March 26, 2022, the $7.5 million coach will turn back into a $2.7 million pumpkin—unless Congress extends the $7.5 million limit or makes it permanent.

This time around, Congress may well do a repeat of last year’s fire drill on the subject.

Congress’s 2020 Actions

Back in 2020, here’s what happens on the $7.5 million limit:

• The Coronavirus Aid, Relief and Economic Security Act” of early 2020 (the “CARES Act”) increases Subchapter V’s eligibility debt limit from $2.7 million to $7.5 million;
• But the $7.5 million limit has a sunset — it’s set to expire a year later (on March 27, 2021) and return to the prior $2.7 million limit;
• In December 2020, Congress passes the “Coronavirus Response and Relief Supplemental Appropriations Act” as part of the “Consolidated Appropriations Act, 2021,” consisting of 5,593 pages—we are all hopeful, back then, that this Act will extend the $7.5 million limit . . . but it doesn’t.

Congress’s Fire Drill in March 2021

So, that leaves Congress with a fire drill in March of 2021 to prevent expiration of the $7.5 million limit.  The fire drill serves to extend the $7.5 million limit — and it does so on the very day that the limit is set to expire.

Here’s what happens back in March of 2021 (from this webpage):

• March 8, 2021, the “COVID-19 Bankruptcy Relief Extension Act of 2021” is introduced as a bill in the House of Representatives, which would extend the $7.5 million limit for one year;
• March 17, 2021, the bill passes, in the House of Representatives, by a vote of 399 to 14, under a “suspension of the rules”;
• March 24, 2021, the same 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.

The problem with the fire drill is this: it leaves lots of people hanging, until the very end, on what to do next. 

Many debtors, back then, are trying to decide whether to file Subchapter V bankruptcy—but they can’t make an informed decision, since they don’t know which debt limit will apply. 

Many debtors are prepared to file on the last effective day of the $7.5 million limit, if the limit is not extended.  And Congress keeps them hanging on that point until that very last day.  

Why only 1 year?

I remember, back in March of 2021, wondering this:  Why is Congress extending the $7.5 million limit for only one year?  And why don’t they make the heightened limit permanent instead?

Presumably, the reason is that Congress doesn’t really like the limit and wants to keep whatever it sees as the limit’s deleterious effects confined into a short time period. 

But here’s what I don’t get: everyone is in favor of the $7.5 limit.  I’m not aware of a single political constituency that opposes it or argues against it any more.

Plus, the increased limit has always been a bipartisan / apolitical issue.  Heck, even in the hyper-politicized and divided context of recent years, the $7.5 million limit gets sponsors from both sides of the Congressional aisle, passes with large majorities in both houses of Congress, and is signed into law by two different presidents—each from an opposing political party.

And Congress can’t agree to make the heightened limit permanent? What’s with that?!

Conclusion

C’mon, Congress.

Let’s make the $7.5 million debt limit for Subchapter V eligibility permanent.

And let’s do so promptly—without another just-before-the-deadline fire drill.

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