The Urgent Need to Increase the Debt Limit for Subchapter V: A Critical Lifeline for Small Businesses
Subchapter V of Chapter 11 has been a beacon of hope for small businesses facing financial distress. Since its introduction under the Small Business Reorganization Act (SBRA) of 2019, Subchapter V has provided a streamlined, cost-effective path for small enterprises to restructure their finances and emerge stronger. However, the current debt limit of $3.024 million under Subchapter V is woefully inadequate, leaving many substantial small businesses without access to this vital tool. It is imperative that Congress act swiftly to raise this limit back to $7.5 million—or even higher—to ensure that small businesses can continue to benefit from this essential lifeline.
Why Subchapter V Matters
Subchapter V was designed with the unique needs of small businesses in mind. Traditional reorganization processes under Chapter 11 are often prohibitively expensive, complex, and time-consuming. These burdens can be insurmountable for small business owners who lack the resources to navigate a lengthy and adversarial process. Subchapter V addresses these challenges by offering a more streamlined and cost-effective approach to debt adjustment, enabling small businesses to reorganize without losing control of their companies.
The benefits of Subchapter V are numerous. It allows for a faster and less expensive restructuring process, with fewer procedural hurdles and reduced administrative costs. Moreover, it provides small business owners with a greater degree of control over the reorganization process, allowing them to develop and implement a plan that is tailored to their specific needs. This flexibility is crucial for businesses that are seeking to navigate financial difficulties while continuing to operate and serve their customers.
The Critical Role of the Subchapter V Debt Limit
The effectiveness of Subchapter V hinges on the debt limit that determines which businesses are eligible to utilize this streamlined process. When Congress temporarily raised the debt limit to $7.5 million under the CARES Act, it significantly expanded access to Subchapter V, allowing a broader range of small businesses to benefit from its provisions. For many, this increase was the difference between survival and closure during a time of unprecedented economic challenges.
The temporary increase to $7.5 million acknowledged the reality that many small businesses, particularly those in capital-intensive industries or those that had taken on debt to weather the economic storm, carry debt loads well above the previous limit. By raising the limit, Congress recognized the need to provide these businesses with a viable path to restructuring, ensuring that they could continue to operate, preserve jobs, and contribute to the economy.
The Case for Raising the Debt Limit Permanently
Now that the debt limit has reverted to $3.024 million, many substantial small businesses are once again excluded from Subchapter V. This reduced limit fails to reflect the current economic landscape, where businesses often carry higher levels of debt due to inflation, rising interest rates, and the lingering effects of the COVID-19 pandemic. For these businesses, the lower limit represents a significant barrier to accessing the streamlined restructuring process they desperately need.
Raising the debt limit back to $7.5 million—or even higher—would provide a more accurate reflection of the financial realities facing small businesses today. It would ensure that a greater number of businesses can access the benefits of Subchapter V, allowing them to restructure their debts in a way that is both efficient and effective. This, in turn, would help to preserve jobs, protect local economies, and support the overall health of the small business sector.
Furthermore, a higher debt limit would reduce the burden on the traditional reorganization process, which is already strained by the number of businesses that are forced to navigate its complexities. By enabling more businesses to utilize Subchapter V, a higher debt limit would alleviate some of the pressure on the traditional process, freeing up resources and court time for cases that truly require the more complex procedures.
Most experts believe that the debt limit should be increased. The American Bankruptcy Institute is the nation’s largest association of bankruptcy professionals, made up of nearly 11,000 members in multi-disciplinary roles, including attorneys, auctioneers, bankers, judges, lenders, professors, turnaround specialists, accountants and others. It established a Subchapter V Task Force to consider and make recommendations to Congress. The key recommendation in the Task Force’s final report is that the $7.5 million debt limit should be made permanent.
The Path Forward
Advocating for a higher debt limit under Subchapter V is not just about providing relief to individual businesses; it is about supporting the small business sector as a whole. Small businesses are the backbone of the American economy, driving innovation, creating jobs, and contributing to the vibrancy of communities across the country. Ensuring that these businesses have access to the tools they need to restructure and thrive is a matter of economic necessity.
The current $3.024 million debt limit is simply too low to accommodate the needs of many small businesses today. Raising the limit back to $7.5 million—or higher—would restore access to Subchapter V for a broader range of businesses, providing them with a realistic and effective path to financial recovery. It would enable these businesses to restructure their debts in a way that preserves their operations, protects jobs, and contributes to the economic recovery.
Conclusion
In conclusion, the temporary increase in the debt limit to $7.5 million demonstrated the positive impact that expanded access to Subchapter V can have on small businesses. As we move forward, it is essential that Congress recognize the ongoing need for a higher debt limit and take action to ensure that Subchapter V remains a viable option for the small businesses that are so critical to our economy. Raising the debt limit is not just a matter of fairness; it is a matter of economic survival for the countless small businesses that form the backbone of our communities.
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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