United States: Congress Further Extends Expanded Eligibility For Small Business Bankruptcy Relief

At the end of June, President Biden signed into law the Bankruptcy Threshold Adjustment and Technical Corrections Act. The new law reinstates the eligibility for many small businesses to take advantage of new streamlined provisions in Chapter 11 of the Bankruptcy Code.

As we previously reported, the CARES Act temporarily expanded the number of small businesses eligible for relief under the Small Business Reorganization Act of 2019 (commonly referred to as the "SBRA"). That expanded eligibility was set to expire on March 27, 2021, but Congress extended it through March 27, 2022. Congress failed, however, to pass a subsequent extension, so on March 28 of this year, the expanded eligibility expired. The new act extends the expanded eligibility for another two years, with many hoping that the extension will be made permanent before the next sunset date.

The SBRA gives small businesses new forms of bankruptcy relief that were not previously available to them under federal law, which is now codified in Subchapter V of Chapter 11 of the Bankruptcy Code. Subchapter V includes provisions for business owners to retain ownership of their businesses without first paying their creditors in full. Under the original act, a small business could qualify for relief under the SBRA provided it had no more than $2,725,635 in aggregate secured and unsecured debt. To help small businesses address the impacts of COVID-19, the CARES Act expanded this limit to $7,500,000, which is the limit that will apply through March 27, 2024.

The Bankruptcy Threshold Adjustment and Technical Corrections Act also fixed a drafting error in the CARES Act that recently made waves in a bankruptcy case in the Central District of California, In re Phenomenon Marketing & Entertainment, LLC. In April 2022, the court in Phenomenon narrowly interpreted the eligibility provisions of the CARES Act, which rendered a large category of small businesses ineligible for relief under the SBRA. By passing the Bankruptcy Threshold Adjustment and Technical Corrections Act, Congress swiftly corrected this unintended error and restored the ability of small businesses to reorganize under Subchapter V.

If your business is in need of a solvency solution, Subchapter V is powerful tool.

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