A Snapshot of Business Bankruptcy: How Subchapter V, the CARES Act, and the Consolidated Appropriations Act Expanded Bankruptcy Relief for Businesses and Business Owners


In February 2020, just before the COVID-19 outbreak, the Small Business Reorganization Act 2019 (Subchapter V) came into force.[1] Subchapter V amends Chapter 11 of the Bankruptcy Code to allow certain people and businesses with debts of less than $ 2,725,625 to file a simplified chapter 11 case in order to make small business bankruptcies faster and less expensive.[2]

Subchapter V includes some unique provisions of Chapter 11, such as: (i) the appointment of a permanent trustee; (ii) allow only one debtor to propose a reorganization plan, which must be filed within 90 days of the date of the request; (iii) except by order of the court, no unsecured creditors committee; (iv) the elimination of the rule requiring that a new value be given in order for the debtor’s shareholders to retain their stake without paying the creditors in full; and (v) allow modification of certain residential mortgages if the underlying loan was not used to purchase the residence and was primarily used in connection with the business.[3]

Very soon after, in response to the COVID-19 epidemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted on March 27, 2020, which among other things , amended the definition of “debtor” for Subchapter V. to increase the debt ceiling from $ 2,725,625 to $ 7.5 million.[4]

As a result of these new laws, creative individual debtors filed a Subchapter V application to restructure personal guarantees for defunct business debts. In addition to the $ 7.5 million debt limitation, to be considered a debtor under Subchapter V, at least 50% of the debt must arise from the business or commercial activities of the debtor.[5] Within these parameters, bankruptcy courts recently found that people whose debts made up at least 50% of commercial debts, such as individual guarantees, could be considered small business debtors under subchapter V. .[6]

For example, the Louisiana Eastern District Bankruptcy Court ruled that commercial loan guarantees from individual debtors constituted commercial debt such that the debtors were classified as small business debtors under Subchapter V.[7] The court found that, because the majority of debtors ‘debts arose from the operation of the debtors’ currently operating businesses, as well as their now defunct businesses, and were for an amount below statutory debt limits. of subchapter V, debtors qualified under subchapter V.[8]

As a result of the CARES Act, businesses received additional COVID-19 relief with the enactment of the Consolidated Credit Act 2021 (CAA) on December 27, 2020, which includes multiple bankruptcy code changes designed to help businesses.[9]

Prior to the enactment of the CAA, the Small Business Administration (SBA), which administers the Paycheck Protection Program (PPP), opposed PPP loans for debtors and enacted rules denying small, bankrupt businesses access to PPP loans.[10] In response, CAA now expressly allows debtors in Chapter 11 Subchapter V cases (as well as Chapter 12 and 13 debtors) to apply for a PPP loan.[11]. However, frustrating for large companies, debtors in traditional Chapter 11 cases were not included and, therefore, would likely continue to be denied PPP loans in bankruptcy.[12]

Another benefit for subchapter V debtors is the CAA’s amendment to Section 365 (d) of the Bankruptcy Code, which allows the court to extend the debtor’s performance period under a non-leasehold. non-residential property matured up to 120 days from the date of the petition if the debtor is experiencing or has experienced hardship due to COVID-19.[13]

The CAA is also amending section 365 (d) (4) (A) of the Bankruptcy Code – to all debtors and not just subchapter V – to extend the time limit for a debtor-tenant to assume or reject a non-residential real estate lease for an additional 90 days for a total of 210 days after the date of the request.[14] Section 365 (d) (4) (B) (i) of the Bankruptcy Code already allows the court to extend the time limit for assuming or rejecting a lease, for cause, by an additional 90 days. Therefore, a debtor could have up to 300 days to decide whether to accept or reject an unexpired commercial lease without the consent of the landlord.

In addition, the CAA aims to encourage landlords and sellers to offer flexible payment terms to debtors by amending the preference provisions of Section 547 to provide that any “payment covered by rent arrears” or “rental arrears”. supplier covered ‘cannot be avoided as preferences.[15] In order to benefit from the exemption, the debtor and the counterparty must have entered into a lease or a contract before the date of the request, the lease or the contract must have been modified on or after March 13, 2020, and this modification must have been deferred or postponed payments due under the lease or contract.[16]

Subchapter V, the CARES Act and the CAA offer multiple new avenues for some businesses and individuals to restructure their debts in a Chapter 11 case. The CARES Act is currently set to expire on March 26, 2021, however, new bipartite legislation was recently introduced to extend the CARES Act Subchapter V debt limitation increase until March 27, 2022.[17] The CAA provisions discussed in this article are all set to expire on December 27, 2022.[18]


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