Sub V Task Force Report In A Nutshell: Part 7—$7,500,000 Debt Cap

By: Donald L Swanson

On April 23, 2024, the American Bankruptcy Institute’s Subchapter V Task Force issued its Final Report.

This article is the seventh in a series summarizing and condensing the Task Force’s Final Report into “a nutshell.”  The subject of this article is:

• whether the $7,500,000 debt cap for Subchapter V eligibility should remain or revert to an interest-adjusted $3,024,725.

Recommendation

Eligibility for Subchapter V should remain at $7,500,000 in aggregate noncontingent, liquidated debt (subject to adjustment for inflation).

Analysis

The current debt cap of $7,500,000 for Subchapter V eligibility enables smaller businesses to reorganize, that cannot do so in standard Chapter 11. 

Maintaining the debt cap at $7,500,000 provides both consistency and access to Subchapter V. 

The current debt cap is scheduled to expire on June 21, 2024, and revert to an inflation adjusted $3,024,725.

Consistency

The $7,500,000 debt cap amount has existed for all but 3.5 months of Subchapter V’s existence, during which months the debt cap was $2,700,000.  Those 3.5 months consisted of Subchapter V’s first six weeks of existence (February 19 to March 26, 2020) and 2 months in 2022 (March 27 to June 21, 2022) when the higher cap temporarily expired.  

Because Congress raised the debt cap so soon after Subchapter V went into effect, the lower debt cap has not been tested through experience. As one Bankruptcy Judge observed:

• we do not want to run such a test at the expense of America’s small businesses, especially as filings are increasing.

Access

Plan confirmation rates in Subchapter V are higher for cases with debts above the lower cap.

The amount of small business debt varies, and large debts do not mean large businesses.  

The amount of debt may reflect a case’s complexity, rather than its size. A very small business could have a very large debt, if something unexpected happens.  For example:

• a Hepatitis A outbreak at a restaurant caused substantial injuries and several deaths, leading to an estimated $40,000,000 in contingent and unliquidated claims for a very small business;
• after recovery of insurance proceeds, tort claimants received a $14,000,000 recovery under a consensual Subchapter V plan; and
• Subchapter V enabled the debtor and its tort claimants to achieve a positive and consensual resolution with low administrative costs. 

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

The Task Force surveyed American Bankruptcy Institute members and other organizations about their experiences with Subchapter V.  When the survey asked respondents to propose one change to Subchapter V, many advocated for making the $7,500,000 debt cap permanent or increasing it.  Only one respondent advocated for a lower cap.

Subchapter V’s debt cap compares with similar caps in Chapters 12 and 13 like this:

• Chapter 12 has a $10,000,000 debt cap for family farmers; and
• Chapter 13 has a $2,750,000 debt cap for consumers.

The task force determined that the Subchapter V debt cap should be aligned more closely with the Chapter 12 debt cap of $10,000,000 for family formers than with the Chapter 13 debt cap of $2,750,000 for consumers.

Creditor Protections

The Task Force heard from some creditor groups that the higher debt cap harms unsecured creditors, but the Task Force did not find supporting evidence. 

Instead, the Task Force found that Subchapter V’s requirement of paying disposable earnings to creditors over a 3-to-5 year period is an effective and practical benefit to unsecured creditors. 

Additionally, unsecured creditors in Subchapter V have many of the same protections that are available in standard Chapter 11, including the ability to seek:

• conversion or dismissal;
• removal of debtor from possession;
• relief from the automatic stay; and
• denial of debtor’s plan.  

Although some creditor rights are different in Subchapter V than in standard Chapter 11, those differences do not justify reducing the debt cap back to an inflation-adjusted amount of $3,024,725.

Moreover, Subchapter V has improved the process and outcomes for creditors.  Witnesses testified, for example, that:

• the higher debt cap is “an improvement” because it shifts away from “fights over class-gerrymandering and creditor vetoes” and refocuses “on economic recovery by comparing liquidation to future plan projections’; and
• payments over a 3-to-5 year plan achieve a better result for creditors over a debtor shutting its doors and liquidating.

Recommendation

Accordingly, the Task Force recommends that Congress pass legislation making the current $7,500,000 debt cap permanent (subject to future adjustment for inflation).

————————–

Footnote 1.  Discussion of this subject is on pages 10 to 14 of the Final Report.

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