Subchapter V Debt Limit Reverts to $2,725,625...For Now

The increased debt limit under Subchapter V of Chapter 11 expired on March 27, 2022 in the absence of congressional action to extend it. Congress originally approved the debt limit increase as a key bankruptcy-related response to the pandemic as part of the CARES Act in 2020, raising the debt limit for Subchapter V eligibility from the original $2,725,625 to $7.5 million.

On March 14, 2022 Sen. Chuck Grassley (R-Iowa) introduced the Bankruptcy Threshold Adjustment and Technical Corrections Act (the "Bill"), aiming to make the increase in the Subchapter V debt limit permanent with wide bipartisan support. Among other amendments, the Bill also seeks to make clear that in Subchapter V cases where a debtor ceases to be a “debtor in possession,” the Subchapter V Trustee is authorized to operate the debtor’s business. Additionally, the Bill seeks to index the $7.5 million debt limit to inflation allowing for the limit to be adjusted upwards every 3 years tied to changes in the Consumer Price Index for All Urban Consumers, published by the Department of Labor. The Bill does not propose adjusting the debt limit on April 1, 2022, when other adjustments will be made.

However, operating on a tight timeline and with other pressing issues before Congress, the increase was not made permanent prior to the deadline. While the debt limit has reverted to its original, lower threshold, it is likely that the effort to permanently raise the debt limit will continue. Given the bipartisan support for the increase, it is likely that the increase will be made permanent in the near future and the Subchapter V debt threshold will bounce back $7.5 million with future increases tied to CPI.