On June 21, President Biden signed into law the Bankruptcy Threshold Adjustment and Technical Corrections Act (BTATCA). The law extends by two years the $7.5 million debt limit for Subchapter V bankruptcies, which was included as a temporary COVID relief measure in the 2020 Coronavirus Aid, Relief and Economic Security Act (CARES). The BTATCA also made the ceiling retroactive to when the last fix had expired.
The $7.5 million debt cap represents an increase from the $2.7 million limit specified in the original Subchapter V legislation, which became an effective component of the Bankruptcy Code in February 2020 as part of the Small Business Reorganization Act of 2019. Together, the higher debt cap and eligibility revision significantly expand the market for Subchapter V filings, a move which generally has been welcomed by the business and legal communities. Time will tell whether Congress makes the higher cap a permanent feature of the law; until then, the limit will revert to $2.7 million in June 2024.
“Originally, Subchapter V was introduced by Congress to help smaller businesses with fewer organizational issues move through the bankruptcy process less expensively and at a faster pace,” says Dan Etlinger, an attorney with the Tampa-based bankruptcy law specialist firm Jennis Morse Etlinger, who confirmed the first Subchapter V bankruptcy in the Middle District of Florida. “It’s a great product, to use that term, which has achieved great results.”
As of July 5, 2022, a total of 3,545 Subchapter V cases have been filed since February 2020, according to the American Bankruptcy Institute. California (379), Texas (374) and Florida (515) account for 1,268 or more than one-third of the filings nationwide. Even further, the Middle District of Florida leads the way for all districts. In April 2022, bankruptcy filing data aggregator Epiq Bankruptcy reports that subchapter V filings increased by 51 percent between February (118) and March (178). The same report notes that “the 81 subchapter V elections filed during the week of March 21 represented the highest weekly total ever, eclipsing the previous record of 71 filed during the same week last year.”
“We’ve definitely seen an uptick here in Florida, which presumably will continue for at least a couple of years, now that the debt-eligibility limit has been extended,” Etlinger observes.
By design, subchapter V provisions are geared toward helping small businesses. Only the debtor in possession can file a reorganization plan, which must be done 90 days after the petition is filed, as opposed to the 120-day window in a Chapter 11 bankruptcy. The debtor is not required to file disclosure statements unless the court says otherwise. Subchapter V cases generally do not require the formation of a committee of unsecured creditors. Individuals can file under Subchapter V if more than half of their debts resulted from running a business and they meet the debt limits.
“A subchapter V bankruptcy is designed to go fast to contain costs,” comments Judge Cathy Peek McEwen, United States Bankruptcy Judge for the Middle District of Florida, in a 2021 online article for the Tampa Bay Bankruptcy Bar Association. “A subchapter V should be as pre-packaged as possible…the roadmap for that fast path to success must be ready early on in the case.”
In November 2020, a report published by the American Bankruptcy Institute identified the types of businesses that chose sub V filing during the year following the law’s enactment. The list included healthcare professionals and facilities (75); restaurants and bars (75); business services (53); retail (51); construction and development (48); trucking and transport (39); real estate, including realtors, property managers and investors (36); home services (36); leisure and entertainment (30); manufacturing (23); energy production and services (21); health and fitness (19); hotels and motels (18); taxi and limousine services (15); farms and ranches (14); auto/truck sales and services (14); financial services including insurance (12); and nonprofit businesses including churches (10).
“Generally speaking, subchapter V bankruptcy is good for small businesses,” maintains Etlinger. “With COVID and everything else, not to mention the cost of gas recently, business owners need a more efficient, less costly way of reorganizing and potentially saving their business, which benefits everyone from the owner and employees to the tax collector and the community as a whole.”
Since the law’s introduction in 2020, Jennis Morse Etlinger has recorded a near perfect run of successful subchapter V filings. Drawing on its extensive experience, the firm is fully capable of steering clients through the bankruptcy process regardless of individual circumstances.
“Most business owners who find themselves in a bind always think they can eke by without having to file bankruptcy,” says Etlinger. “Or maybe they’ve heard that filing costs millions of dollars. With these recent changes to bankruptcy law, any business owner considering the prospect should at least schedule a meeting with an experienced bankruptcy firm sooner than later.”