American Bankruptcy Institute Sends Letter to Congress Further Supporting Maintenance of $7.5MM Debt Cap for Subchapter V

The American Bankruptcy Institute’s Subchapter V task force transmitted a letter to key members of Congress providing further supplemental input regarding its preliminary report supporting the maintenance of the $7.5 million debt cap for Subchapter V eligibility, which was released in December.

“Since issuing its preliminary report, the task force was asked to consider whether, based on its recent in-depth study of Subchapter V cases, a change to address affiliate and insider debt for debtor eligibility is advisable,” Soneet Kapila of KapilaMukamal and president of the ABI, wrote in the letter to Senate Judiciary Chairman Richard Durbin (D-Ill.); Sen. Lindsay Graham (R-S.C.); Rep. Thomas Massie (R-Ky.), chair of the House Judiciary Subcommittee on the Administrative State, Regulatory Reform and Antitrust; and Rep. Luis Correa (D-Calif.), the ranking member of the subcommittee.

The letter highlighted a few of task force’s findings to support the conclusion that no changes are needed to the eligibility standards for Subchapter V:

• According to the task force, requiring smaller businesses to include affiliate or insider debt in the Subchapter V eligibility standard would discourage smaller business owners, shareholders or related entities from extending loans or credit to the debtor business, which is a form of funding frequently relied upon by smaller businesses.

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• The task force did not receive or uncover any evidence that affiliate or insider debt was allowing larger or more complex businesses to file for Subchapter V bankruptcy or otherwise abuse the system.

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• The task force’s study demonstrates that Subchapter V is working as intended by Congress, helping smaller businesses reorganize their businesses and make payments to their creditors.

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“Based on the foregoing, the task force strongly recommends no change to the eligibility standards under Subchapter V at this time,” Kapila wrote.

The task force’s preliminary report found that nearly 30% of all Chapter 11 bankruptcy cases filed since the enactment of the SBRA have been Subchapter V cases. Significantly, the task force found that more than 25% of these Subchapter V debtors would have been ineligible for Subchapter V relief under the lower debt cap.

The Task Force will be issuing its Final Report on April 19 at the ABI’s 2024 Annual Spring Meeting in Washington, D.C.