NEW YORK (AP) — A type of bankruptcy protection application that made it easier for small businesses to seek tax relief has expired, making it harder for small businesses with more than $3 million in debt to file.
The type of filing, known as Subchapter V, is less expensive and takes less time than the traditional Chapter 11 bankruptcy filing.
The rule went into effect in 2020 as part of the Small Business Reorganization Act. It allowed small businesses with less than $2.75 million in debt to file under the subchapter. That debt limit was extended to $7.5 million in March 2020 amid the pandemic for a year, and the limit has been extended two more times.
A bill to make the debt ceiling permanent failed, so the debt threshold returned to $3 million (the original debt ceiling adjusted for inflation) on June 21.
Subchapter V filing imposes shorter deadlines for filing plans of reorganization, allows for greater flexibility in negotiating restructuring plans with creditors, and does not require the payment of quarterly U.S. trustee fees. A trustee is appointed for each case, and the trustee works with the small business debtor and creditors to facilitate a plan of reorganization.
According to data compiled by the U.S. Department of Justice’s Trustee Program, between 2020 and 2023, 51% of plans filed by Subchapter V filers were confirmed by a judge, compared to 31% of plans filed by filers in other types of bankruptcy protection. Subchapter V filers had half the percentage of plans rejected as other filers, and a shorter confirmation time.
