Subchapter V’s $7.5 Million Debt Limit Is Renewed: With Bells & Whistles!

By: Donald L Swanson

Congress and the President finally extend the $7.5 million debt limit for Subchapter V eligibility:

• by “unanimous consent” in the Senate;
• by a vote of 392 – 21 in the House; and
• signed by the President on June 21, 2022.

A legislative history of the new law is at this link.

The new law is bi-partisan and uncontroversial.  But there are some bells and whistles, as discussed below.

“SUNSET” – Again!

For starters, the new law has another “SUNSET” provision!  Seriously?!  Another one of those?

At least this time, it takes two years for the sun to set (on June 21, 2024)—not one year, like each of the last two times.  

Notably, the “SUNSET” provision does not exist in the original version of the bill, when introduced at the Senate—it is added there by amendment.  Apparently, someone really, really wants the “SUNSET”—and makes sure of its addition by amendment.

Seriously!  What’s with that?!  The $7.5 million debt limit has now been approved by Congress and two Presidents—three times.  And that’s without any serious opposition. 

Why doesn’t Congress simply make the $7.5 million limit permanent?  We actually have an answer—from debate on the House floor (yes . . . 40 minutes of debate occurs on the bill, transcribed here, though no one speaks against it).  Here’s the explanation:

• “we just don’t have certain data about some of these bankruptcy policy changes or their likely long-term effects. That is why these changes to our Bankruptcy Code should be temporary”;
• “An additional 2 years of normal post-pandemic bankruptcy activity will give us a better understanding of the underlying policy issues and will help guide the future design of our bankruptcy system”; and
• “this bill did not go through regular order in the Judiciary Committee, so it did not benefit from robust oversight or legislative hearings. Americans are best served when Federal policy is made after careful and focused congressional deliberation, something that would have occurred in regular order.”

There’s the explanation for another sunset. . . . Whatever.  It’s just weird.  And irritating.  And a waste of Congressional time, effort and resources.

Retroactive Effect

Congress didn’t bother to get an extension passed, this year, before the setting of the sun on Subchapter V’s $7.5 million debt limit—on March 27.

So, the new law includes these “retroactive” provisions:

• “(2) RETROACTIVE APPLICATION OF CERTAIN AMENDMENTS.—The amendments made by subsections (a), (d), (e), and (f) shall apply with respect to any case that—(A) is commenced under title 11, United States Code, on or after March 27, 2020; and (B) with respect to a case that was commenced on or after March 27, 2020 and before the date of enactment of this Act, is pending on the date of enactment of this Act.”  (Emphasis added.)

Note:  the retroactive effect is all the way back back to March 27, 2020—that’s two years ago. 

Removal of “Issuer”

The prior law contains confusing “issuer” language that’s now cleaned-up. 

Prior statutes (§ 101(51D)(B)(iii) and § 1182(1)(B)(iii)) say: the term “debtor  . . . does not include . . . any debtor that is an affiliate of an issuer (as defined in section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 78c)).” (Emphasis added.)

A recent bankruptcy court opinion suggests that such “issuer” language means this: only businesses owned by individuals can qualify for Subchapter V (see this article).

Fortunately, the new law amends the “issuer” language to read: the term “debtor . . . does not include . . . (iii) any debtor that is an affiliate of a corporation described in clause (ii)” (emphasis added).  And the said “clause (ii)” describes a corporation that is “subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)).”

Accordingly, the “issuer” exclusion from Subchapter V eligibility applies only to businesses owned by publicly traded companies. 

Note:  this is one of the changes given retroactive effect to March 27, 2020—which means it applies to all existing and future cases.

Inflation Adjustment

The new law authorizes an adjustment for inflation, every three years, to Subchapter V’s $7.5 million debt limit. It does so by amendment to 11 U.S.C. § 104.

11 U.S.C. § 104 is titled “Adjustment of dollar amounts” and now provides: 

“(a) On April 1, 1998, and at each 3-year interval ending on April 1 thereafter, each dollar amount in effect under sections . . . 707(b), 1182(1), . . . immediately before such April 1 shall be adjusted—(1) to reflect the change in the Consumer Price Index . . . “ (emphasis added).

The new law’s retroactive effect to March 27, 2020, does not apply to this inflation adjustment provision.  So, inflation adjustments to the $7.5 million debt limit will run only from and after the date of the new law’s enactment.

Notably, the first three-year adjustment to the $7.5 limit will happen in 2025. Does that presume an extension of the $7.5 million limit’s sunset in 2024?

Clarification of Trustee’s Autority

The new law also makes this clarification: when a Subchapter V debtor “ceases to be a debtor in possession,” the Subchapter V trustee is authorized to “operate the business of the debtor.” This clarification is accomplished by amending § 1183(b)(5).

This amendment is given retroactive effect, as described above.

Conclusion

Here’s a big “thank you” to Congress for extending Subchapter V’s $7.5 million eligibility limit, cleaning up the “issuer” confusion, providing for retroactive effects, adding an inflation adjuster, and clarifying the Subchapter V trustee’s authority.

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