Debt ceiling expires to limit fast lane to small business bankruptcy

A temporary Covid-era measure that allows small businesses with up to $ 7.5 million in debt to file Chapter 11 under a new, streamlined process is set to expire this month, sparking anticipation lawyers that more businesses will declare bankruptcy before the window closes.

Companies that reach the current debt threshold are eligible for accelerated bankruptcies, as outlined in subchapter V of the Bankruptcy Code. The debt ceiling was $ 2.7 million until Congress increased it through temporary legislation last year to allow more struggling business owners to use protective measures against bankruptcies to deal with the economic fallout from the pandemic. The threshold is expected to return to the original cap on March 27, unless lawmakers extend it.

If they don’t, struggling businesses with more than $ 2.7 million in debt will consider a longer and more expensive Chapter 11 process, lawyers say.

Many small businesses that took on debt during the pandemic could file for bankruptcy at the last minute if they think they won’t qualify after March 27, Donald L. Swanson, bankruptcy attorney and shareholder of Koley Jessen, told Omaha, Neb.

“Everyone is terrified that if Congress doesn’t act, there is going to be a wave” of Subchapter V filings, Swanson said.

Bipartite legislation (Art. 473) recently introduced by the Senses. Richard Durbin (D-Ill.) And Charles Grassley (R-Iowa) would extend the $ 7.5 million threshold for another year. The bill is still in committee.

Businesses have benefited from the increased debt limit, data shows. A Bloomberg Law analysis of Subchapter V filings in Delaware through October 2020 showed that 20% of filers reported debt levels between $ 2.7 million and $ 7.5 million.

The impending March expiration date is starting to trigger a surge in Subchapter V filings, said Teadra Pugh, legal analyst at Bloomberg Law.

More than 40 new cases were filed in the last week of February, up from 75 for the whole of January, she said.

Yet Pugh warned that uncertainties over the pandemic have made bankruptcy filings difficult to predict. “Covid blew all the rules out the window.”

Greater availability

Subchapter V of the Bankruptcy Code, which came into effect in February 2020, eliminates many of the expenses of a traditional Chapter 11. The process does not require companies to file a disclosure statement, pay US trustee fees, or form a formal unsecured creditors committee. .

The subchapter also allows a debtor to repay debts and attorney fees gradually over three to five years, and to retain equity in the business even if creditors are not paid in full.

Some creditors might not support extending the higher threshold because it would open up the debtor-friendly process to more businesses, said James D. Silver, partner at Kelley Kronenberg in Fort Lauderdale, Fla.

Unlike other forms of bankruptcy, Subchapter V does not allow creditors to force changes to a confirmed plan if the debtor’s situation improves later, Silver said. “There is no vehicle to come back and change things,” he said.

For small businesses in distress, however, it is “essential” that Congress extend the $ 7.5 million threshold, said James Bailey, restructuring lawyer and partner at Bradley Arant Boult Cummings LLP in Birmingham, Alabama.

The increased limit made Subchapter V available to a multitude of businesses that would not otherwise have qualified.

Sunglasses retailer Solstice Marketing Concepts LLC fell below threshold with qualifying debt of $ 7.259 million when it filed for bankruptcy on Feb. 18.

“Small” businesses qualify

Distressed companies are torn between filing for bankruptcy or waiting to see if they can get help from the recently passed U.S. bailout law, said Alan Crane of Furr & Cohen PA in Boca Raton, Fla.

Subchapter V is still new, so many companies may not even know it exists or that the $ 7.5 million threshold is about to expire, he said. .

Business owners may also not know they qualify for Subchapter V, said Bethany Simmons, bankruptcy attorney and senior counsel at Loeb & Loeb LLP in New York City. A business can actually have over $ 7.5 million in total debt while still benefiting from the streamlined process, she said.

This is because the debt limit only applies to “unconditional liquidated” debt, such as money owed to commercial sellers or payments owed on a bank loan. But other contingent debts – some debt obligations that could come due in the future – are not included in the threshold, Simmons said.

Courts have found that contingent debts excluded from the Subchapter V limit include future lease payments and Paycheck Program loans, Simmons said. Money owed to insiders and affiliates also does not count towards the debt ceiling, she said.

Limits on the types of debt included in the threshold allowed Greylock Capital Associates LLC, the parent company of hedge fund Greylock Capital Management LLC, to use Subchapter V to cancel an expensive lease in Manhattan. The company, which has invested in more than 100 countries on six continents, was able to show that it had less than $ 7.5 million in debt because the majority of the overall debt instead belonged to non-bankrupt subsidiaries.

Firms in financial difficulty should look at Subchapter V and consider filing “as soon as possible,” Simmons said. “A well-organized deposit doesn’t happen overnight,” she said.

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