NEW YORK (AP) — A type of bankruptcy protection filing that made it easier for small businesses to seek relief has expired, which will complicate filing for small businesses with more than $3 million in debt.
The filing type, known as Subchapter V, is cheaper and less time-consuming than the traditional Chapter 11 bankruptcy filing.
The rule went into effect in 2020 as part of the Small Business Reorganization Act. It let small businesses with less than $2.75 million in debt file under the subchapter. That debt limit was extended to $7.5 million in March 2020 amid the pandemic for one year — and that was extended two more times.
A bill to make the debt limit permanent failed, so the debt threshold reverted to $3 million (the original debt limit adjusted for inflation), on June 21.
Subchapter V filing imposes shorter deadlines for filing reorganization plans, allows for greater flexibility in negotiating restructuring plans with creditors and doesn’t require the payment of U.S. Trustee quarterly fees. A trustee is appointed for each case and the trustee works with the small business debtor and creditors to facilitate a reorganization plan.
According to data compiled by the Justice Department’s U.S. Trustee Program, between 2020 and 2023, Subchapter V filers had 51% of plans confirmed by a judge, compared with 31% of plans from filers of other types of bankruptcy protection. Subchapter V filers had half the percentage of plans dismissed compared with other filers, and a shorter time to confirmation.
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The temporary provision known as Subchapter V, which offered an easier path to bankruptcy protection for small businesses dealing with financial difficulties, has come to an end. This change will create challenges for small businesses with debts exceeding $3 million. Subchapter V was designed to be a more cost-effective and less time-consuming alternative to the traditional Chapter 11 bankruptcy process.
Implemented in 2020 under the Small Business Reorganization Act, Subchapter V initially allowed small businesses with less than $2.75 million in debt to file for bankruptcy under this designation. The debt threshold was later increased to $7.5 million due to the pandemic, but ultimately reverted to the original $3 million (adjusted for inflation) limit on June 21 after a failed attempt to make the higher limit permanent.
One of the key benefits of filing under Subchapter V is the shorter deadlines for submitting reorganization plans, increased flexibility in negotiating with creditors for restructuring, and exemption from quarterly fees to the U.S. Trustee. In each case, a trustee is appointed to assist the small business debtor and creditors in developing a viable reorganization plan.
Data from the U.S. Trustee Program at the Justice Department indicates that between 2020 and 2023, a higher percentage of Subchapter V filers had their reorganization plans confirmed by a judge compared to filers under other bankruptcy protection types. Additionally, Subchapter V filers experienced a lower rate of plan dismissals and a quicker confirmation process, signifying the effectiveness of this bankruptcy approach for small businesses in financial distress.
