On June 21, 2022, President Joe Biden signed the Bankruptcy Threshold Adjustment and Technical Corrections Act into law; the full text of which can be viewed here. The Act restores the previous debt limit for small businesses filing for bankruptcy under subchapter V of the chapter 11 Bankruptcy Code, from $2,725,625 to $7,500,000.
Subchapter V makes filing for bankruptcy a viable option for small businesses by eliminating certain costly and cumbersome proceedings found in traditional chapter 11 reorganizations. Before, chapter 11 applied to all business equally, no matter if they were a fortune 500 company or a “mom and pop” boutique. The Small Business Reorganization Act of 2019 (SBRA) added subchapter V to chapter 11 of the Bankruptcy Code and is applicable to small businesses within the debt limit, originally set at $2,725,625.
In April of 2020, as apart of the CARES Act, the debt limit for businesses filing under subchapter V was temporarily increased to $7,500,000 in order to allow more small business debtors the opportunity to stay in business and retain employees amidst the COVID-19 pandemic. This temporary increase expired in March of 2022 and the debt cap was reduced to the original $2,725,625 limit. The new limit established by the Bankruptcy Threshold Adjustment and Technical Corrections Act is set to expire on June 21, 2024.
This Act arrives as pressures from inflation, increased operating costs, and supply shortages continue to test the resilience of small business owners across the country. By raising the debt limit from $2,725,625 to $7,500,000, more small businesses are now eligible and may begin to seek relief under subchapter V.