The Coronavirus Aid, Relief, and Economic Security (CARES) Act included an array of provisions to help the country get through the pandemic. One of which that helped small businesses continue operations was an extension of the debt limit under Subchapter V of Chapter 11 bankruptcy.
What is Subchapter V?
Subchapter V is a portion of Chapter 11 bankruptcy that allows certain businesses to progress through the bankruptcy process on a more efficient path. A typical Chapter 11 bankruptcy can take a long time to complete, while a Subchapter V often takes weeks or months. In addition to taking less time to complete, Subchapter V can also cost less. Part of the way this process cuts both time and cost is through the use of a government appointed trustee instead of creditor committees. That trustee can guide the process instead of having a back and forth with the committees.
In an effort to keep businesses running in spite of the negative impact of the pandemic, Congress increased the debt limit for Chapter 11 bankruptcy petitions from the $2,725,625 pre-pandemic limit to $7.5 million in March of 2020. By allowing more businesses to qualify for Subchapter V, they reasoned businesses could seek reorganization of their financial obligations instead of a need to liquidate and close their businesses — and businesses responded. Businesses took advantage of this extension, with The Washington Post reporting an estimated 3,000 seeking restructuring through Subchapter V. This allowed the vast majority of qualifying businesses to slash their debt and continue operations during the worst of the pandemic.
The extension was not indefinite. The limit was originally set to expire in March of 2021, but Congress chose to extend the increase through March of 2022.
What happens after March of 2022?
Although lawmakers proposed another extension through December of 2022, it has not progressed through the channels towards approval. As a result, the increase expired on March 27, 2022.
What does this mean for small business who continue to struggle to meet their financial obligations?
Those who continue to struggle are not alone. Although the initial stay at home orders that came with the pandemic have subsided and customers are returning to restaurants, stores and seeking services offered by small businesses in their communities, supply chain issues and the impact of inflation have continued to ravage these same businesses throughout the country. Subchapter V remains a possibility for many, and other options are available for those who do not qualify for this version of restructuring. It is important to consider all options carefully before choosing the right path towards financial stability for your business.