[Originally Published 4/6/20; Updated 6/3/22, 3/6/25]
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) passed by Congress and signed into law by the President on March 27, 2020, provides substantial economic stimulus to individuals, businesses, and health care facilities to address the remarkable and unprecedented impacts of the novel coronavirus (COVID-19). The CARES Act also includes important provisions relating to bankruptcy law. Some of these provisions sensibly apply to individual debtors, allowing them to exclude CARES Act stimulus payments from certain income calculations otherwise applicable in a case.
But the CARES Act also dramatically increases the amount of debt that can be owed by a business debtor that wants to elect the benefits of a new section of Chapter 11, known as Subchapter V, added by the Small Business Reorganization Act of 2019 (the “SBRA”). This increase in the debt limit is important because Subchapter V materially shifts the balance of power in a Chapter 11 case even more in favor of the debtor, so creditors must be prepared to actively protect their rights with the likely increase in new Subchapter V cases that seem destined to follow.
Specifically, the CARES Act increases the debt ceiling for a “small business debtor” from roughly $2.725 million to $7.5 million. While the debt ceiling increase sunsets after one year (i.e., unless the deadline is modified in the future, the debt limit will revert back to $2.725 million in March 2021), many more struggling businesses will now have access to a new set of reorganization tools, impacting creditors’ rights in the process.
[UPDATE as of March 2025—In June 2022, the $7,500,000 debt ceiling for Small Business Debtors was extended for two more years, to June 2024, but Congress has failed to act to extend the higher threshold since that time. Effective as of April 1, 2025, due to regular three-year increases based upon the Consumer Price Index, the maximum debt ceiling for small business debtor treatment under Subchapter V will be $3,424,000. Various groups are lobbying to reinstate the $7,500,000 limit and make it permanent, or perhaps even increase the cap to $10 million, which would make Subchapter V available to a much broader group of businesses. However, none of these proposals has yet to gain the approval of Congress.]
Under the SBRA, passed last August but only effective February 19, 2020, if a debtor elects to proceed under Subchapter V, there are several important provisions not otherwise applicable in a usual Chapter 11 case. To name a few:
These are just a few of, but not the only, debtor-friendly provisions that creditors will have to confront under the SBRA.
When this article was originally written, the CARES Act was only a couple of weeks old and the SBRA itself was in effect for less than two months. In the ensuing five years, Debtors and their counsel have made increasing use of Subchapter V and its more debtor-friendly provisions. As a result, creditors must be especially vigilant throughout the Chapter 11 and Subchapter V process and strongly consider engaging experienced bankruptcy counsel to protect their rights and to guide them through this constantly-evolving area of bankruptcy law.
For further information about the CARES Act, the SBRA, and how you might proactively address dealing with customers and vendors that might seek protection under the new laws, contact KMK Attorneys Samuel Wisotzkey (swisotzkey@kmksc.com) or Eric von Helms (evonhelms@kmksc.com) or 414-962-5110 for assistance.
About KMK
At Kohner, Mann & Kailas, S.C. (KMK), the attorneys in the Business & Financial Services group are prepared to provide coordinated legal counsel across a wide array of creditors’ rights activities. KMK is a value-driven law firm, combining the resources necessary to serve the complex needs of its Fortune 500 clients with the personal care and superior customer service expected by all its clients. Founded in Milwaukee in 1937, KMK has successfully developed a local, national, and international reputation for legal excellence, continually recognized by U.S. News & World Report as one of the nation’s Best Law Firms. For more information, visit www.kmksc.com.