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Nashville Chapter 11 Bankruptcy Update: Subchapter V Eligibility Debt Limit Set to Decrease to $2.7 Million on June 21, 2024


Subchapter V of Chapter 11, introduced under the Small Business Reorganization Act of 2019, offers a streamlined process for small and middle market businesses to restructure their debts, solidify their balance sheets, and reposition for future success. This provision has been crucial during economic downturns, providing a lifeline for struggling businesses. Understanding how it works and the implications of legislative changes to its debt limit is essential for small business owners and economic analysts alike. The $7,500,000 debt limit for Subchapter V eligibility is set to expire on June 21, 2024. Unless Congress extends it, the limit will decrease to just over $2.7 million, meaning that all but the smallest businesses will lose access to this transformational tool.


Understanding Subchapter V

Subchapter V offers a streamlined and less costly path through Chapter 11 for small and middle market businesses. Prior to its enactment, small businesses faced numerous challenges under traditional Chapter 11, including high costs and complex procedural requirements that made restructuring difficult and less accessible.


Key Features of Subchapter V

Subchapter V offers several advantages over traditional Chapter 11 that make it more accessible and beneficial for small businesses:


1. Simplified Process

Subchapter V simplifies the bankruptcy process for small businesses by eliminating certain procedural burdens and costs associated with a traditional Chapter 11 filing. This includes waiving the requirement to form a committee of creditors unless ordered by the court, and not requiring a disclosure statement, which can be both costly and time-consuming. Debtors have a 90-day deadline to propose a reorganization plan, but many companies can complete the entire process in as little as 8 weeks.


2. Faster Reorganization

The debtor must submit a reorganization plan within 90 days of filing for bankruptcy, speeding up the reorganization process. This quick timeline helps reduce legal and administrative costs and allows the business owner to focus on running the business rather than being bogged down by lengthy court procedures. Some companies can complete the entire process in as little as 8 weeks.


3. Greater Control

Subchapter V offers business owners more control over the reorganization process. The business owner can retain equity in the company without support from any creditors, a requirement known as the "absolute priority rule" that is waived under Subchapter V.


4. Increased Chance of Confirmation

A Subchapter V trustee is appointed to help facilitate confirmation of a consensual reorganization plan. This appointment often increases the likelihood of a successful outcome.


The $7.5 Million Debt Limit

The CARES Act of 2020 temporarily increased the debt limit eligibility for Subchapter V from $2,725,625 to $7,500,000, significantly expanding access to Subchapter V’s benefits. This adjustment was made to address the economic fallout from the COVID-19 pandemic, recognizing that many small to medium-sized businesses were disproportionately impacted. The higher limit allows a greater number of businesses to avail themselves of Subchapter V's streamlined processes. Congress has repeatedly extended the increase, but it is set to expire again on June 21, 2024.


What is the Impact for Nashville Companies Needing Chapter 11 Bankruptcy If the $7.5 Million Cap Is Not Extended?

The temporary increase to the $7.5 million cap is set to expire unless Congress acts to extend it. Should this expansion lapse, the debt limit will revert to the original figure of approximately $2.7 million. The implications are significant:


1. Reduced Accessibility

Many businesses that could have qualified under the $7.5 million threshold might find themselves ineligible under the lower limit, barring them from using Subchapter V's more debtor-friendly provisions.


2. Increased Costs and Complexities

These businesses may be forced into traditional Chapter 11, which is more complex and costlier, potentially leading to higher rates of business failures.


3. Economic Impact

Given the ongoing economic challenges, particularly in the wake of the pandemic and “higher for longer” interest rates, a failure to extend the cap could hinder the recovery of small and medium-sized businesses, adversely affecting the broader economy.


Conclusion

Subchapter V presents a vital lifeline for small businesses struggling under excessive debt burdens by offering a more accessible and economically feasible route through Nashville Chapter 11 bankruptcy. The extension of the $7.5 million debt eligibility cap is crucial in maintaining this lifeline for a wider range of businesses, particularly in uncertain economic times. As such, it is critical that Congress extend and make the higher limit permanent. The coming months will be pivotal in determining how legislative actions will shape the landscape of small business reorganizations in the U.S.


 

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About EmergeLaw, PLC

EmergeLaw is a boutique law firm that represents small and middle market businesses and their owners in debt workouts, Chapter 11 reorganizations, Subchapter V restructurings, and other proceedings to help them deleverage and reposition for future success. Applying decades of experience and a specialized toolkit, our Nashville business restructuring attorneys help entrepreneurs, family businesses, private equity funded companies, and real estate investors maximize value in ways that many clients find unexpectedly efficient and effective.


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