June 8, 2022Client Alert

UPDATE: Congress Further Extends Bankruptcy Relief to Small Businesses with Less Than $7.5 Million of Debt

      On June 7, 2022, Congress passed (in a 392-21 vote) the “Bankruptcy Threshold Adjustment and technical Corrections Act,” which raises the debt limit back to $7.5 million for businesses electing treatment under the Small Business Reorganization Act (“SBRA”), codified under Subchapter V of Chapter 11.

      Earlier this year, the $7.5 million limit was reduced to $3,024,725 after the prior version of the law (under the CARES Act) expired on March 27. Once the President signs the new bill into law, the $7.5 million limit will remain in place for another 2 years, until it is again set to sunset.

      Subchapter V includes unique provisions for small businesses such as allowing an owner of a small business debtor to retain a stake in the company despite not paying all creditors back in full. As such, the Act eliminates the so-called Absolute Priority Rule, which generally requires that unsecured creditors be paid in full before equity holders may retain their interests as part of a bankruptcy restructuring. Also important is that only the small business debtor may file a plan under Subchapter V; lenders and other creditors may only object to a debtor’s plan, rather than file a competing plan, as is their right under traditional Chapter 11 cases. 

      In addition to the small business-friendly reorganization provisions, the Act also streamlines the process. For example, there are no unsecured creditor committees nor lengthy disclosure statement required. The process is also accelerated, with an initial status conference required within 60 days and a reorganization plan required within 90 days of commencement.

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