NEW YORK (AP) — A type of bankruptcy protection that made it easier for small businesses to seek relief has expired, complicating the process for those with more than $3 million in debt.
This filing method, called Subchapter V, is less expensive and takes less time than a traditional Chapter 11 bankruptcy filing.
The rule went into effect in 2020 as part of the Small Business Reorganization Act, allowing small businesses with debts of less than $2.75 million to apply under this provision. The debt limit was extended to $7.5 million for one year in March 2020 during the pandemic and has since been extended two more times.
A bill to make the debt ceiling permanent was defeated, so on June 21, the debt limit was returned to $3 million (the original debt limit adjusted for inflation).
Subchapter V filings provide shorter deadlines for filing reorganization plans, greater flexibility in negotiating reorganization plans with creditors, and eliminate the need to pay U.S. Trustee quarterly fees. A trustee is appointed in each case, and the trustee works with the small business debtor and creditors to facilitate the reorganization plan.
According to data compiled by the Department of Justice’s U.S. Trustee Program, between 2020 and 2023, 51% of plans filed under Chapter 5 bankruptcy were approved by a judge, compared with 31% of plans filed by filers for other types of bankruptcy protection. Chapter 5 filers had half the plans rejected compared to other filers, and their plans were approved in less time.
