The Subchapter V bankruptcy protection filing, which provided relief for small businesses with less than $7.5 million in debt, has expired. Now, small businesses with more than $3 million in debt will face complications when filing for bankruptcy. This filing type was created as part of the Small Business Reorganization Act in 2020, making it cheaper and less time-consuming than the traditional Chapter 11 bankruptcy filing.
Originally, businesses with less than $2.75 million in debt could file under Subchapter V, but this limit was extended to $7.5 million in March 2020 due to the pandemic. However, with the failure of a bill to make this debt limit permanent, the threshold reverted back to $3 million on June 21. This debt limit was the original threshold adjusted for inflation.
Subchapter V filing comes with several benefits, including shorter deadlines for filing reorganization plans, greater flexibility in negotiating restructuring plans with creditors, and no requirement to pay U.S. Trustee quarterly fees. A trustee is appointed for each case to work with the small business debtor and creditors to facilitate a reorganization plan.
According to data from the U.S. Trustee Program, Subchapter V filers had a higher rate of plans confirmed by a judge (51%) compared to other types of bankruptcy protection filers (31%) between 2020 and 2023. Additionally, Subchapter V filers had a lower percentage of plans dismissed and a shorter time to confirmation, highlighting the effectiveness of this filing type for small businesses.