The Expiration of Subchapter V Bankruptcy Protection: What Small Business Owners Need to Know

In 2020, the Small Business Reorganization Act was introduced, creating a new bankruptcy protection option for small businesses with less than $7.5 million in debt – Subchapter V. This filing type was designed to be cheaper and more efficient than the traditional Chapter 11 bankruptcy filing, making it an attractive option for many small business owners.

However, as of June 21, 2023, the Subchapter V bankruptcy protection filing has expired. This means that small businesses with more than $3 million in debt will face complications when filing for bankruptcy. Originally, businesses with less than $2.75 million in debt could file under Subchapter V, but this limit was extended to $7.5 million in March 2020 due to the pandemic. Unfortunately, with the failure of a bill to make this debt limit permanent, the threshold reverted back to $3 million on June 21.

Despite its limitations, Subchapter V filings come with several benefits that make it an attractive option for small businesses facing financial difficulties. For instance, filers have shorter deadlines for filing reorganization plans and greater flexibility in negotiating restructuring plans with creditors. Additionally, there is no requirement to pay U.S. Trustee quarterly fees which can help save money for struggling small businesses.

Data from the U.S. Trustee Program shows that between 2020 and 2023, Subchapter V filers had a higher rate of plans confirmed by a judge (51%) compared to other types of bankruptcy protection filers (31%). Moreover, they had a lower percentage of plans dismissed and a shorter time to confirmation which highlights the effectiveness of this filing type for small businesses.

In conclusion, while the Subchapter V bankruptcy protection filing has expired as of June 21st, it remains an effective option for small businesses facing financial difficulties who have less than $3 million in debt before June 21st or if they are able to secure permanent legislation extension beyond this date.