Small businesses could find filing for bankruptcy more difficult as government program expires

A type of bankruptcy protection filing that made it easier for small businesses to seek relief has expired, which will complicate filing for small businesses with more than $3 million in debt

Small Business Monitor Bankruptcy Program (Copyright 2022 The Associated Press. All rights reserved)

A type of bankruptcy protection filing that made it easier for small businesses to seek relief has expired, which will complicate filing for small businesses with more than $3 million in debt.

The filing type, known as Subchapter V, is cheaper and less time-consuming than the traditional Chapter 11 bankruptcy filing.

The rule went into effect in 2020 as part of the Small Business Reorganization Act. It let small businesses with less than $2.75 million in debt file under the subchapter. That debt limit was extended to $7.5 million in March 2020 amid the pandemic for one year — and that was extended two more times.

A bill to make the debt limit permanent failed, so the debt threshold reverted to $3 million (the original debt limit adjusted for inflation), on June 21.

Subchapter V filing imposes shorter deadlines for filing reorganization plans, allows for greater flexibility in negotiating restructuring plans with creditors and doesn't require the payment of U.S. Trustee quarterly fees. A trustee is appointed for each case and the trustee works with the small business debtor and creditors to facilitate a reorganization plan.

According to data compiled by the Justice Department’s U.S. Trustee Program, between 2020 and 2023, Subchapter V filers had 51% of plans confirmed by a judge, compared with 31% of plans from filers of other types of bankruptcy protection. Subchapter V filers had half the percentage of plans dismissed compared with other filers, and a shorter time to confirmation.