The Debt-Ceiling for Subchapter V is about to Shrink

On March 27, 2021, the temporary increase of the Subchapter V debt ceiling to $7.5 million will expire and revert back to the original $2,725,625.00 cap. Subchapter V became effective on February 19, 2020, right as the COVID-19 pandemic was overtaking the United States. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) became law and, among other things, raised the debt ceiling for Subchapter V. With the expanded debt ceiling set to expire, many businesses are about to lose their eligibility at a time when the future is uncertain due to the pandemic.

Subchapter V was designed to provide a streamlined and user-friendly Chapter 11 reorganization process for small businesses that may lack the sophistication and means of those that typically file for Chapter 11. Numerous features help accomplish that goal, including the following: (1) a 90-day deadline for filing a plan; (2) no requirement for a separate disclosure statement and the solicitation of plan acceptances; (3) no requirement that the debtor obtain the acceptance of one impaired class; and (4) a trustee is always appointed to help develop a plan and administer the plan. These features and others make Subchapter V cheaper, faster, and easier to get through for a small business than a traditional Chapter 11. 

While Subchapter V provides a number of advantages, filings have been slower than expected even with the expanded debt ceiling. According to data released by Epiq, only 20% of the Chapter 11 cases filed between February 19, 2020 and October 1, 2020 were Subchapter V filings (https://www.epiqglobal.com/en-us/about/news/restructuring-bankruptcy/slow-start-to-chapter-11-subchapter-v-bankruptcy). While filings have been lower than expected, data shows a good chunk of the filed cases have been Subchapter V cases. For instance, data from the District of Delaware indicates that 20% of Subchapter V cases filed between February 19 and October 1, 2020 have debtors with debt between 2.7 and 7.5 million. (https://news.bloomberglaw.com/bankruptcy-law/expiring-debt-cap-to-limit-small-business-bankruptcy-fast-lane). 

In addition, data shows that the number of Subchapter V cases filed have gradually increased from May to September of 2020. (https://www.epiqglobal.com/en-us/about/news/restructuring-bankruptcy/slow-start-to-chapter-11-subchapter-v-bankruptcy).   In fact, data from Delaware indicates 40 new Subchapter V cases were filed at the end of February 2021, compared to 75 for all of January (https://news.bloomberglaw.com/bankruptcy-law/expiring-debt-cap-to-limit-small-business-bankruptcy-fast-lane). 

In total, the data shows that Subchapter V filings are increasing and that the debt ceiling has opened up the streamlined process to a larger number of debtors than would otherwise be eligible. The expiration of the debt ceiling expansion will cut off a great number of businesses from the streamlined process at a time when there may be a greater need for the relief Chapter 11 reorganization can provide. Thankfully, it looks like Congress has seen the need to extend the expansion of the debt ceiling for another year. On March 17, 2021, a bill proposing to extend the debt ceiling for another year passed the in the House (H.R. 1651). While only a few days remain until its expiration, it looks like the expanded debt ceiling is on track to remain in place for another year. 


Henry O. Hilston
Henry joined the firm in 2020. He practices in the Business Bankruptcy and Creditor’s Rights practice group as well as the Civil Litigation practice group.