Small Business Bankruptcies Spiked Before the Debt Limit Ended

Posted on July 10, 2024 at 10:01am by

Bankruptcies under Subchapter V of Chapter 11 soared to a record high of filings in a single day as the debt limit of $7 million was reverted back to $3 million, with 91 filings on June 20, exceeding the typical volume of eight to 10 filings in a typical business day. Originally intended to last only one year, the higher limit was extended twice, with filings surging both times as the deadline approached.

The law introducing Subchapter V went into effect in 2020, with the goal of making Chapter 11 bankruptcies faster and less expensive for small businesses by eliminating the need for disclosure statements and creditors’ committees. The Subchapter also removes the absolute priority rule that mandates priority claims to be fully repaid before the lower-ranking claims receive recoveries.

In a report from Law360, Jonathan Grasso of YVS Law LLC represented Julian’s Recipe, a packaged, frozen baked goods company that was one of the companies filing under the Subchapter. “Subchapter V is an extremely important tool that allows small businesses to quickly and efficiently complete the Chapter 11 reorganization process,” Grasso stated in the report.

Many companies that aimed to file ahead of the debt limit expiration found the deadline to file to be unclear as to whether it was June 20 or June 21. On a webpage from the U.S. Department of Justice, it was previously stated that the deadline to file was “through June 21.” However, the page now says the lower limit applies to “cases commenced on or after June 21.” The language used resulted in many companies narrowly missing the deadline for filing under the lower debt limit.

Subchapter V was very popular, with many hoping that the debt limit would be lifted permanently. A study from the American Bankruptcy Institute found that cases under the subchapter were less expensive and fewer were dismissed or converted to liquidations. As the debt limit reverts back to its original limit adjusted for inflation, many companies will experience higher levels of distress to figure out how to deal with their debts.

If you are a small business facing overwhelming debt and want to know what the next best steps should be, talk to a professional at Sader Law Firm today. The attorneys at Sader Law Firm are available to answer all questions and figure out the best course of action for you and your business. Contact us at (816) 561-1818 for a free phone consultation and learn more about what actions might be the best decision for you.