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ANALYSIS: Subchapter V Filings Steady Despite Debt-Limit Sunset

May 10, 2022, 9:00 AM

Subchapter V’s temporary debt-limit increase to $7.5 million expired through sunset provisions on March 27, 2022, but despite the lower debt limit, Subchapter V filings for the month of April were still relatively close to levels seen in recent months, suggesting an increase in small business distress.

The debt limit dropped back to $2,725,625 at the end of March, increasing to $3,024,725 April 1 due to an inflationary adjustment.

There were 101 Subchapter V filings in April, a drop of about 47% from March’s total of 192. The March surge in Subchapter V filings likely included debtors within the temporary debt limit that rushed to file cases before the March 27 sunset.

However, even with the decreased debt limit, April’s total is relatively close to the Subchapter V case totals filed in December 2021 (99), January 2022 (111), and February 2022 (119), when the higher debt limit was in effect.

April’s total could signal an increase in small businesses seeking bankruptcy protection. However, it could also mean that most pre-sunset Subchapter V filers had debts below $3 million and could have qualified without the expanded access.

Legislation to restore the higher debt limit has passed the Senate and is currently under consideration in the House. However, if it’s not acted on this month, the prospects of passage may be more unlikely as members of Congress focus on the midterm elections. Facing this uncertainty, some small business debtors who may qualify under the proposed legislation may try to negotiate forbearance agreements with lenders and delay a filing in order to take advantage of Subchapter V should it become available to them once again.

Resources for understanding bankruptcy can be found in the Bankruptcy Fundamentals Toolkit. Resources for understanding Chapter 11 are available in our Practical Guidance: Voluntary Chapter 11 suite.

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