Senate Bill Introduced to Set $7.5 Million Permanent Bankruptcy Code Indebtedness Limit for Subchapter V Cases

On March 14, 2022, Senator Charles Grassley of Iowa introduced Senate Bill 3823 entitled “Bankruptcy Threshold Adjustment and Technical Corrections Act” in the United States Senate (the “Bill”), which proposes Amendments to Subchapter V of Chapter 11 of the United States Bankruptcy Code (the “Code”) and Chapter 13 of the Code. The bill is initially co-sponsored on a bipartisan basis by Senators John Cornyn of Texas, Dick Durbin of Illinois and Sheldon Whitehouse of Rhode Island.

The bill proposes to make permanent the $7,500,000 debt limit provided for in Code section 1182(1) so that debtors can receive relief under subchapter V (the option small business accelerated bankruptcy under the Small Business Reorganization Act of 2019 (the “SBRA”)). The debt limit is currently set to expire on March 27, 2022.

Originally, the indebtedness limit to qualify under Subchapter V was $2,725,625 of unconditional, liquidated, secured, and unsecured debt (excluding debt owed to affiliates or to initiates). Under the Coronavirus Aid, Relief and Economic Security Act signed into law on March 27, 2020, the limit was temporarily increased to $7.5 million for one year. This increase was extended for an additional year by the COVID-19 Bankruptcy Relief Extension Act of 2021 and will expire on March 27 without passage of the bill or other legislation to extend it.

In addition, the bill seeks to index the $7.5 million debt limit to inflation, allowing the limit to be adjusted upward every three (3) years to reflect changes consumer price index for all urban consumers, published by the Ministry of Labour. The bill does not propose to adjust the debt limit on April 1, 2022, while other adjustments will be made.

Among other changes, the bill also seeks to clarify that in subchapter V cases where a debtor ceases to be a “debtor in possession”, the subchapter V trustee is authorized by the Code to operate the debtor’s business.

For Chapter 13 cases (for individuals seeking to reorganize or liquidate their Chapter 7 debts and assets), the bill proposes a new, increased and combined debt limit of $2,750,000 for secured debts and not guaranteed, not conditional. Under current law, the debt limit for such cases is lower and split between secured debt ($1,257,850) and unsecured debt ($419,275). The bill therefore increases the debt limit for Chapter 13 cases by more than $1 million and simplifies eligibility requirements. This change will increase the number of people eligible and may require people who would otherwise have to file individual bankruptcy cases under Chapter 11 to file under Chapter 13. As a result, creditors, especially banks, credit unions and other lending institutions may become involved with Chapter 13 cases more frequently than before and may need additional knowledge and guidance on how to navigate the Chapter 13 case and plan process.

The bill will need to pass the Senate and House of Representatives before it can be considered for signature by the president. Bill can be tracked here.

Norman D. Briggs