By Erica L. Kravchenko and Jeffrey C. Toole
June 21, 2022
On June 21, 2022, President Biden signed the bipartisan-supported “Bankruptcy Threshold Adjustment and Technical Corrections Act” into law. The Act makes several changes to the federal Bankruptcy Code that will broaden the availability of chapter 13 and chapter 11 relief for wage earners and various small business debtors, respectively.
First, the Act increases the availability of chapter 13 to wage earners (and their spouses) by increasing the debt ceiling for such cases. Prior to enactment, eligibility under chapter 13 of the Bankruptcy Code required a wage-earning individual (and spouse who elects to file bankruptcy too) to owe less than $465,275 in noncontingent, liquidated debts and $1,395,875 in noncontingent, liquidated, secured debts. The Act amends section 109(e) of the Bankruptcy Code to eliminate this distinction between unsecured and secured debt, so that all debt counts toward a single debt limit. Now, to be eligible for relief under chapter 13, the wage earner (and spouse, if applicable) must have total noncontingent, liquidated debts of less than $2.75 million. The debt limit increase takes effect immediately and is expected to sunset on June 21, 2024 (unless Congress extends it).
Second, the Act expands businesses’ and individuals’ ability to file so-called “subchapter V” reorganization cases under chapter 11 of the Bankruptcy Code, as compared to the past few months. Effective in early 2020, the Small Business Reorganization Act of 2019 (the “SBRA”) provided that, to qualify for relief under subchapter V of chapter 11, debtors could not owe more than $2,725,625 in noncontingent, liquidated secured and unsecured debts as of the petition date. In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) increased this debt ceiling to $7.5 million temporarily. Initially, that debt limit increase was scheduled to automatically sunset on March 27, 2021, but Congress extended that expiration date to March 27, 2022.
Due to scheduling and procedural issues, Congress allowed that increased debt ceiling to lapse on March 27, 2022, returning the debt ceiling to its original SBRA level – i.e., approximately $2.7 million. Under the Act, the debt ceiling will increase (back) to $7.5 million. Furthermore, this debt ceiling increase will apply retroactively to all subchapter V cases that were commenced under chapter 11 of the Bankruptcy Code on or after March 27, 2020, and that remained pending as of the date the Act was enacted. This increase will remain in effect for two years, until June 21, 2024 (unless Congress further extends it). The Act also clarifies that the $7.5 million debt ceiling is subject to future adjustments for inflation, as are various other dollar amounts in the Bankruptcy Code.
In addition, the Act amends the Bankruptcy Code to provide that “standing trustees” appointed in subchapter V cases are expressly authorized to operate a debtor’s business if the debtor ceases to be a “debtor in possession.” It also makes various technical corrections and refinements to other statutory provisions.
Lastly, the Act resolves what some commentators labeled as a flaw in subchapter V relief that was created by the CARES Act. Prior to the CARES Act, the SBRA excluded from the definition of a “small business debtor” (and precluded from filing under subchapter V of chapter 11) any corporation subject to the reporting requirements of the Securities Exchange Act of 1934 (the “SEC Act”). The CARES Act further narrowed this definition, precluding from subchapter V eligibility any debtors that are affiliates of an “issuer” as defined by the SEC Act. Some courts interpreted this change to preclude a company from seeking relief under subchapter V of chapter 11 if any of its affiliates are publicly traded – even if none of those affiliates was itself in bankruptcy and even if the company seeking relief under subchapter V was not an “issuer” under the SEC Act. The Act appears to resolve this interpretive issue by amending certain definitions in the Bankruptcy Code. Now, a small business debtor that is an affiliate of a publicly traded company nonetheless is eligible for relief under subchapter V (if it meets other statutory requirements), provided that it is not an “issuer” under the SEC Act and provided that it is not an affiliate of a publicly traded company that itself is in bankruptcy.
If you have questions about the Act or other aspects of bankruptcy law, please contact us.