ABI’s Subchapter V Task Force Recommends Making The $7,500,000 Debt Cap Permanent

The American Bankruptcy Institute’s Subchapter V Task Force has issued its “Preliminary Report” on “Maintaining the $7,500,000 Debt Cap for Subchapter V Eligibility.” This article quotes from and summarizes the Report.

Recommendation

The Task Force recommends making permanent the $7,500,000 debt cap for Subchapter V eligibility, which is set to expire and revert to $3,024,725 on June 21, 2024.

Supporting Factors

Here are “Supporting Factors” for the recommendation—verbatim.

“The overwhelming consensus of bankruptcy professionals, bankruptcy judges, and academics is that Subchapter V is functioning as Congress intended. Many have commented that Subchapter V is the most effective and useful bankruptcy legislation passed since enactment of the Bankruptcy Code in 1978. Subchapter V debtors are confirming plans at higher rates, more quickly, and at lower costs than non-Subchapter V small business cases and regular Chapter 11 cases. . . .

Maintaining the debt cap at $7,500,000 provides consistency and access to Subchapter V as a debt restructuring tool for small businesses that cannot reorganize in a regular Chapter 11 case.
Because Congress raised the debt cap so soon after Subchapter V went into effect, most Subchapter V debtors have filed while the $7,500,000 debt cap has been in place.
Reverting to the lower debt cap, which is untested, would make reorganization inaccessible to many small businesses. More than a quarter of Subchapter V debtors would not have been eligible for Subchapter V under the lower cap.
Bankruptcy professionals overwhelmingly support making the current $7,500,000 debt cap permanent.
No clear reason, supported by data, exists for reversion to the lower, untested debt cap.”

What follows is summary of the remainder of the Task Force’s Preliminary Report.

Introduction

Congress enacted Subchapter V to facilitate the reorganization of small business debtors. The new law became effective on February 19, 2020.

Six weeks later, Congress temporarily increased the debt cap from $2,725,625 to $7,500,000, making Subchapter V relief more widely available.

The temporary $7,500,000 debt cap has been extended twice, and the most recent extension sunsets on June 21, 2024.

The Task Force recommends making the $7,500,000 debt cap permanent, along with future adjustments for inflation.

Reasons

Maintaining the $7,500,000 debt cap provides consistency and access to Subchapter V for smaller businesses that cannot succeed in regular Chapter 11.

The lower cap would make reorganization inaccessible to many smaller businesses, since >25% of Subchapter V debtors that already filed would have been ineligible under the lower cap.

A business that meets the $7,500,000 debt cap is still a small business.

Bankruptcy professionals overwhelmingly support the $7,500,000 debt cap becoming permanent, and no clear reason exists for reverting to the lower, untested cap.

Reasons Offered for a Lower Debt Cap

If the $7,500,000 debt cap is not extended by June 21, 2024, it will automatically revert to $3,024,725 (after adjustments for inflation).

Arguments presented by some trade groups for reverting to the lower cap include:

the higher cap will increase lending costs and restrict access to capital for all small businesses;
the higher cap imposes greater costs on creditors because they lack protections available in regular Chapter 11; and
Subchapter V debtors with confirmed plans are failing to make plan payments.

The Task Force investigated these claims but did not find supporting evidence.

Findings

The Task Force finds that Subchapter V is functioning as Congress intended and that the debt cap should remain at $7,500,000.

More than 40 witnesses (bankruptcy judges, practitioners, and Subchapter V trustees) testified, and nearly all acclaim Subchapter V as a success in saving small businesses.

Subchapter V cases are faster, more affordable, and provide a more feasible path to reorganization. One Bankruptcy Judge provided this cost comparison from her district:

the average amount of professional fees awarded in non-SubV Chapter 11 cases was $679,387; whereas,
the average amount of professional fees awarded in SubV cases was $145,790.

Another Bankruptcy Judge explained that Subchapter V allows for financial rehabilitation to entities previously priced out of traditional Chapter 11—this is a great value.

The Subchapter V data show that confirmation rates are higher, most debtors confirm plans more quickly, and dismissals occur earlier. Notably:

between 45% and 55% of all Subchapter V cases achieved confirmed plans, 69% of which were consented to by all creditor classes; whereas,
before Subchapter V, only 25% of debtors with assets or liabilities less than $10 million were able to confirm a plan in regular Chapter 11.

Moreover, only .014% of all Subchapter V debtors have filed a second Subchapter V case.

Congress Should Make the $7,500,000 Debt Cap Permanent

Witnesses overwhelmingly support making the $7,500,000 debt cap permanent.

Some want to increase the debt cap to $10,000,000, to align Subchapter V more closely with Chapter 12’s $10,000,00 debt cap for family farmers. The lower $3,024,725 cap would align Subchapter V more closely with the $2,750,000 consumer debt cap in Chapter 13.

Witnesses testified that Subchapter V has improved the reorganization process and outcomes not only for debtors but also creditors, because:

Subchapter V focuses the parties’ efforts more quickly on economic recovery rather than on creditor-veto or holdout power; and
allocating payments over a three-to-five-year plan achieves a better result for creditors than shutting the doors and liquidating.

Conclusion

Subchapter V is successful in saving small businesses, which benefits owners, employees, and creditors. The Task Force finds strong support for legislation that maintains Subchapter V debt eligibility at $7,500,000—permanently.

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