In 2019, Congress enacted the Small Business Reorganization Act, which created subchapter V within chapter 11 of the Bankruptcy Code.  Congress’ intent was to create a more cost-efficient and streamlined restructuring process for small businesses by modifying certain provisions of chapter 11 for debtors with claims below a specific debt cap.  In particular, because creditors typically have smaller claims against these small businesses, the new subchapter takes into account the likelihood that there will be no or minimal meaningful creditor participation. 

Since the Small Business Reorganization Act went into effect, the new subchapter has become increasingly popular.  In 2023, there was a substantial increase in subchapter V elections.  Similarly, the statistical data available for this year[1] indicates another remarkable increase in subchapter V filings.  In January 2024, there were 176 subchapter V elections within chapter 11, which reflects a 43% increase when compared to January 2023.  In February 2024, there were 213 subchapter V elections.  This is a 22% increase from January 2024, and a staggering 78% increase from the previous year.

As noted above, subchapter V modifies various aspects of a typical chapter 11 case, so the current jump in popularity may in part be explained by bankruptcy practitioners gaining increased experience and familiarity with the unique provisions of subchapter V. 

For example, subchapter V imposes accelerated deadlines on debtors pushing toward a faster plan confirmation.  However, there are also unique plan and disclosure statement requirements that help smooth the path towards confirmation.  For instance, the bankruptcy court may determine that a debtor’s plan contains adequate information making a separate disclosure statement unnecessary.  The standards for plan confirmation are also markedly different because rules like the absolutely priority rule do not apply, and a plan can be confirmed even without a class of consenting creditors.  Overall, data shows that subchapter V debtors do confirm plans faster, and, of course, faster plan confirmation also means reduced costs for debtors.

Outside of plan confirmation, there are other differences that may reduce the costs of a bankruptcy filing.  For example, there is no general unsecured creditors’ committee, which means the estate does not have to foot the bill for additional professionals.  However, a trustee is assigned to each subchapter V even when a debtor remains in possession.  The trustee will appear at major hearings, investigate the debtor’s business, and generally oversee the development of a plan of reorganization. Nevertheless, studies have revealed that the average professional fees in a chapter 11 case are $679,387 compared to only $145,790 in a subchapter V.

Subchapter V’s current climb in popularity can also be explained by the increased debt cap from around $3 million to $7.5 million.  The increased debt cap has allowed additional debtors to take advantage of the subchapter.  In fact, over 25% of subchapter V debtors would be ineligible under the lower threshold.  The higher cap was put in place in response to the COVID-19 pandemic.  It was originally set to expire in March 2021, but it has since been extended through June 21, 2024.

On December 15, 2023, the American Bankruptcy Institute’s Subchapter V Task Force issued a preliminary report recommending that the cap remain at $7.5 million permanently.  The report noted strong industry support for maintaining the current debt cap.  The American Bankruptcy Institute will issue its final report in April.  If the increased cap does become permanent, it is likely that subchapter V will continue to remain an attractive alternative to qualifying entities.